Question
Market rate is 10%. The Orange Inc. has the opportunity to invest in one of two mutually exclusive machines that will produce a product it
Market rate is 10%. The Orange Inc. has the opportunity to invest in one of two mutually exclusive machines that will produce a product it will need for the next 8 years. Orange can pick only machine A or machine B but not both. Machine A costs $10 million (year zero) and would provide cash inflows of $2.46 million per year for 8 years, beginning at year 1. With an identical timeline, Machine B costs $15 million and would provide cash inflows of $3.5 million per year for 8 years.
a)What is the IRR of machine A?
b)What is the IRR of machine B?
c)Which one would you choose? (Hint: remember that for mutually exclusive projects, you cannot compare individual IRRs!!!)
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