In the process of researching new equipment, Aldo settled on two seemingly viable alternatives:
A one-time investment today of $40,000, which should generate net after-tax cash inflows of $20,000 per year for the next 3 years.
A one-time investment today of $50,000, which should generate net after-tax cash flows of $30,000 per year for the next 3 years.
Both amounts already include the depreciation tax shield. Aldo’s minimum required return is 8%. Calculate the NPV and IRR for both of these investments. Which investment appears to be the better option? How might Aldo’s decision change if option 1 involves a vendor with whom Aldo has an established, good relationship, while option 2 involves a new, but highly reviewed, vendor?
Compare expected NPV with actual NPV.
