Consider the following mutually exclusive pieces of equipment that perform the same task. Thetwo alternatives available provide the following set of after-tax net cash flows:

Year Cash Flow(A) Cash Flow(B)

0 -$20,000 -$20,000

1 13,000 6,500

2 13,000 6,500

3 13,000 6,500

4 6,500

5 6,500

6 6,500

7 6,500

8 6,500

9 6,500

Equipment A has an expected life of three years, whereas equipment B has an expected life of nine years. Assume a required rate of return of 14 percent.

a. Calculate each equipments payback period. (2 points)

b. Calculate each equipments discounted payback period. (4 points)

c. Calculate each equipments Net Present Value (NPV). (4 points)

d. Calculate each equipments internal rate of return. (4 points)

e. How would you rank the investments based on the NPV criterion? (1 point)

f. How would you rank the investments based on the IRR criterion? (1 point)M2

g. The ________ assumes the reinvestment of funds at a rate equal to the equipmentsIRR. (1 point)

h. The _______ assumes the reinvestment of funds at the firms cost of capital. (1 point)