DISCOUNT RATES, AUTOMATED MANUFACTURING, COMPETING INVESTMENTS A company is considering two competing investments. The first is for a standard piece of production equipment; the second is for computer-aided manufacturing (CAM) equipment. The investment and after-tax operating cash flows follow:

Year Standard Equipment CAM Equipment 0 $(500,000) $(2,000,000)

1 300,000 100,000 2 200,000 200,000 3 100,000 300,000 4 100,000 400,000 5 100,000 400,000 6 100,000 400,000 7 100,000 500,000 8 100,000 1,000,000 9 100,000 1,000,000 10 100,000 1,000,000 The company uses a discount rate of 18 percent for all of its investments. The company’s cost of capital is 10 percent.

Required:

. Calculate the NPV for each investment by using a discount rate of 18 percent.

. Calculate the NPV for each investment by using a discount rate of 10 percent.

. Which rate should the company use to compute the NPV? Explain.

Problem