The CTO of a pharmaceutical firm will install one of two mechanical devices to reduce costs. Both devices have useful lives of 5 years and no salvage value.

Device A cost: $10,000

- Expected to result in $3,000 savings annually.

Device B cost: $13,285

- Expected to result in savings of $3,000 the first year, and then savings will increase $500 annually. [Year 2 savings will be $3,500, Year 3 savings will be $4,000 and so on]

Interest at 7%, which device should the firm purchase?

1. Use IRR and show the sequence of alternatives being assessed

2. Use ERR and show the sequence of alternatives being assessed