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Problem 1: Internal Rate of Return (IRR) (10 marks) Your firm is considering overhauling its production plant. The finance department in consultation with the engineering
Problem 1: Internal Rate of Return (IRR) (10 marks) Your firm is considering overhauling its production plant. The finance department in consultation with the engineering department has come up with two proposals, one for a minor overhaul and one for a major overhaul. These two proposals have the following cashflows (in millions of dollars) Cost of capital of these projects is 12%. If your firm follows Internal Rate of Return (IRR) in making all investment decisions, which proposal you think your firm should accept? Please show detailed workings/calculations and explanation of your recommendation. Problem 2: Projects with different costs and lives (5 marks) Mr. Butler runs a lawnmowing business. Recently his manager Ms Natalie reported that one of the mowers has to be replaced. After analysing the prices of different mowers, Ms Natalie finally came up with two options: Option 1: Mower A costs $250 and expected to last 2 years - Option 2: Mower B costs $360 and expected to last 3 years Mr. Butler instructed Ms Natalie to purchase mower B, since its investment is $360/3=$120 per year, which is lower than the investment of $250/2=$125 per year in mower A. Ms Natalie purchased mower B and replaced the old one. Did Mr. Butler take the correct decision? Explain your answer with detailed workings/calculations. Assume 10% cost of capital
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