California Mining is evaluating the introduction of a new one production process.Two alternatives are available.Production process A an inital cost of $25000 a 4 year life and a $5000 net salvage value and use of Process A will increase net cash flow by $13000 year for each of the 4 years that the equipment is in use
Production process B also requires an initial investment of $25000 will also last 4 years and it's expected salvage value is zero but process B will increase net cash flow by $15247 per year
MANAGEMENT believe that risk= adjusted discount rate of 12 percentage should be used for process A
If California Mining is to be indifferent (same NPV for Process A and B) between the two process what risk adjusted discount rate must be used to evaluate B ?
For process A: Inputs: CF0 = -25000; CF1 = 13000; CF2 = 18000; I = 12. Output: NPVA = 17663.13. For process B: Inputs: CF0 = -42663.13 (-25000-17663.13); CF1 = 15247; Nj = 4. Output: IRR = 16% = r.