The CFO of Edgeworth Inc., a cardboard box maker, is deciding between one of two new cardboard cutting machines: the Super Cutter and the Duper Cutter. The cash flows for the two cutters are as follows:

The cost of capital for both machines is 10 percent. Assume that you have no other resource constraints and that you do not have to consider future investments.

a. Based on the IRR, which cutter do you recommend? Explain your reasoning.

b. Based on the PI, which cutter do you recommend? Explain your reasoning.

c. Overall, what is your recommendation to the CFO? Explain your recommendation given your answers to

(a) and (b).

NPV IRR

a. $1,905 10.9%

b. $1,905 26.0%

c. $3,379 10.9%

d. $3,379 26.0%

Transcribed Image Text:

Super Cutter Duper Cutter Year Cash Flow Year Cash Flow 0 -21,000 0 -80,000 1 6,000 1 21,000 2 6,000 2 21,000 34 6,000 3 21,000 6,000 4 21,000 56 6,000 5 21,000 6,000 6 21,000