Patterson Company is considering two competing investments. The first is for a standard piece of...
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Patterson Company is considering two competing investments. The first is for a standard piece of production equipment. The second is for computer-aided manufacturing (CAM) equipment. The investment and after-tax operating cash flows are as follows:
Year Standard equipment CAM equipment
R R
0 5 000 000 20 000 000
1 3 000 000 1 000 000
2 2 000 000 2 000 000
3 1 000 000 3 000 000
4 1 000 000 4 000 000
5 1 000 000 4 000 000
6 1 000 000 4 000 000
7 1 000 000 5 000 000
8 1 000 000 10 000 000
9 1 000 000 10 000 000
10 1 000 000 10 000 000
Patterson uses a discount rate of 18% for all its investments. Pattersons cost of capital is 10%.
2.4 Calculate the NPV for each investment by using a discount rate of 18%. (11)
2.5 Calculate the NPV for each investment by using a discount rate of 10%. (11)
2.6 Which rate is the best for Patterson and why?
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