Cates and Company is considering investing in a new piece of farming equipment that has a cost of $65,000. It promises cost savings of $13,000 per year, after taxes, at the end of each of the next 10 years. The owner currently anticipates the farming equipment to have no salvage value at the end of its useful life.

Compute the internal rate of return for this project. In a few sentences, interpret the meaning of your result.

Compute the internal rate of return, assuming that cost savings were to last only 7 years, instead of 10 years, and the farming equipment will have a salvage value of $8,500 at the end of 7 years. In a few sentences, interpret the meaning of your result. Was there a change compared to item (a)? If so, what does this change signify?

PROBLEM B Gargoyle Products is considering two different investment opportunities:

Project P costs $285,000 and offers eight annual net cash inflows of $60,000. Gargoyle Products requires an annual return of 14% on projects like P.

Project Q costs $385,000 and offers nine annual net cash inflows of $70,000. Gargoyle Products demands an annual return of 12% on investments of this nature.

Compute the IRR and payback period of each project and use this information to identify the better investment. Be certain to explain you reasoning.