Both Old Line Industries and New Tech, Inc., use the IRR to make investment decisions. Both firms

Question:

Both Old Line Industries and New Tech, Inc., use the IRR to make investment decisions. Both firms are considering investing in a more efficient $4.5 million mail-order processor. This machine could generate after-tax savings of $2 million per year over the next three years for both firms. However, due to the risky nature of its business, New Tech has a much higher cost of capital (20%) than does Old Line (10%). Given this information, answer parts (a)–(c).

a. Should Old Line invest in this processor?

b. Should New Tech invest in this processor?

c. Based on your answers in parts (a) and (b), what can you infer about the acceptability of projects across firms with different costs of capital?

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...