. Capital Budgeting Ethics. Tadd and Todd manage similar stores of Tough Tires. They met at a recent managers' conference and discussed their need for new car lifts at their stores. At the meeting, the company's controller made a presentation on next year's capital investment budget. Funds are scarce, proposals will be studied carefully, the cutoff rate will be raised, and fewer proposals approved. Tadd and Todd return to their stores and prepare competing proposals for the lifts. Tough Tires assumes a 40 percent tax rate. Their data show the following:

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1. Develop a rough estimate of the IRR for the two proposals.
2. Why would the two sets of estimates differ so much?
3. How might the Tough Tires controller test the managers' estimates?

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Cost of equipment Installation costs.. Sale of old equipment net of taxes.. Incremental depreciation expense each year Reduced operating expenses per year. Increased contribution margin per year. Salvage value of new machine net of taxes Life of equipment.... Tadd's Proposal $100,000 in Year O 15,000 in Year 0 5,000 in Year O 11,500 per year 20,000 per year 15,000 per year 10,000 in Year 10 10 years Todd's Proposal $100,000 in Year O 5,000 in Year O 10,000 in Year 0 7,000 per year 25,000 per year 25,000 per year 30,000 in Year 15 15 years