NPV/IRR Homework Assignment Legend Company is trying to reduce its cost structure in an effort to boost profits. It is looking at automating parts of its production process. It is evaluating two different pieces of equipment to accomplish the cost reductions. Equip A Cash Flows Year 2 Today Year 1 Year 3 Year 4 Cost of equipment Shipping & handling Start-up expenses Total Investment $ (100,000) $ (5,000) $ (15,000) $ (120,000) $ 15,000 $ 40,000 $ Labor savings (after tax) Salvage value (after tax) Total Savings 50,000 $ $ 50,000 $ 50,000 5,000 55,000 $ 15,000 $ 40,000 $ WACC 9% NPV IRR Payback Equip B Cash Flows Year 2 Today Year 1 Year 3 Year 4 Cost of equipment Shipping & handling Start-up expenses Total Investment Labor savings (after tax) Salvage value (after tax) Total Savings $ (120,000) $ (5,000) $ (5,000) $ (130,000) $ 30,000 $ 40,000 $ 50,000 $ 50,000 $ 5,000 50,000 $ 55,000 $ 30,000 $ 40,000 $ WACC 9% NPV IRR Payback 1) Explain what NPV means to your CEO. 2) Should you invest in this project? Why? 3) What are the two major drawbacks to using IRR? 4) Explain why Payback sucks as a value metric