Sweeney Manufacturing has a plant where the equipment is essentially worn out. The equip¬

ment must be replaced, and Sweeney is considering two competing investment alternatives.

The first alternative would replace the worn-out equipment with traditional production equipment; the second alternative uses contemporary technology and has computer-aided design and manufacturing capabilities. The investment and after-tax operating cash flows are shown below for each alternative.

The company uses a discount rate of 18% for all of its investments. The company's cost of capital is 14%.
Required:
1. Calculate the net present value for each investment using a discount rate of 18%.
2. Calculate the net present value for each investment using a discount rate of 14%.
3. Which rate should the company use to compute the net present value? Explain.
4. Now assume that if the traditional equipment is purchased, the competitive position of the firm will deteriorate because of lower quality (relative to competitors who did au¬
tomate). Marketing estimates that the loss in market share will decrease the projected net cash inflows by 50% for Years 3 through 10. Recalculate the NPV of the traditional equipment given this outcome. What is the decision now? Discuss the importance of assessing the effect of intangible and indirect benefits.

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Year Traditional Equipment Contemporary Technology 01234561 7890 $(1,000,000) $(4,000,000) 600,000 200,000 400,000 400,000 3 200,000 600,000 4. 200,000 800,000 200,000 800,000 6 200,000 800,000 200,000 1,000,000 200,000 2,000,000 10 200,000 200,000 2,000,000 2,000,000