Spacemonitor’s analyst is helping the company’s chief industrial engineer to choose between two machines for the new factory. The machines are capable of much the same functions, but they have very different expected cash flows. The table below gives the expected net incremental after-tax cash flows for both machines.

(a) Show how to use the IRR method to choose between the two machines if the hurdle rate is 10%.

(b) Show how to use the NPV rule to choose between the two machines if the discount rate is 10%.

(c) Discuss the relative advantages or disadvantages of the two methods for this purpose. For simplicity, use end-of-year discounting.

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End of year Project 0 1 2 3 4 5 6 IRR Machine A 0 -400 130 130 130 130 130 18.7% Machine B 0 -200 70 70 70 70 70 70 22.1%