Hotel Catering Company is considering two pieces of equipment for food production: Model 1 and Model 2. The two equipment will perform the same task. Model 1 will cost $48 000, Model 2 will cost $36 000.

The two alternatives available will provide the following cash inflows:

Year Model 1 Model 2

1 $13 000 $9000

2 $13 000 $9000

3 $13 000 $7000

4 $15 000 $8000

5 $14 000 $8000

6 $10 000 $5000

Model 1 has an expected life of six years.

Model 2 has an expected life of six years.

Repairs and maintenance for the Model 1 is $1000 PER year

Repairs and maintenance for Model 2 is $1500 PER year

Model 1 will have a salvage value of $5000 after 6 years

Model 2 will have a salvage value of $10 000 after 6 years

Working capital needed for Model 1 is $5000

Working capital needed for Model 2 is $4000

The working capital will be released at the end of the project

Assume a cost of capital of 12%.

Assume that the tax rate is 40% and that each piece of equipment is being depreciated over 6 years:

3) Is the IRR more or less than 12%, explain