Tyler, Inc., is considering switching to a new production technology. The cost of the required equipment will

Question:

Tyler, Inc., is considering switching to a new production technology. The cost of the required equipment will be $4 million. The discount rate is 12 percent. The cash flows that the firm expects the new technology to generate are as follows.

Years CF

1–2 .............................. 0

3–5 ........................... $ 845,000

6–9 ......................... $1,450,000

a. Compute the payback and discounted payback periods for the project.

b. What is the NPV for the project? Should the firm go ahead with the project?

c. What is the IRR, and what would be the decision based on the IRR?

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...