Question
Thru Way is evaluating the purchase of a hydraulic lift system to use for the machines brought in for repair. This should mean more efficient
Thru Way is evaluating the purchase of a hydraulic lift system to use for the machines brought in for repair. This should mean more efficient operations and turnaround on each repair. The company has narrowed their choices down to two: the Elite Model and the Super Model. Financial data about the two choices follows:
| Elite | Super |
Investment | $320,000 | $240,000 |
Useful life (years) | 8 | 8 |
Estimated annual net cash inflows for useful life | $75,000 | $40,000 |
Residual value | $30,000 | $10,000 |
Depreciation method | Straight-line | Straight-line |
Required rate of return | 14% | 10% |
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Which alternative should they select using payback period?
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Does the decision change if they use the net present value model to evaluate investments? *Remember these are different size investments.
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Briefly explain what you would expect the internal rate of return to be for each of these alternatives.
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