ABC Mining is evaluating the introduction of a new ore production process. Two alter¬natives are available. Production Process A has an initial cost of $25,000, a 4-year life, and a $5,000 net salvage value, and the use of Process A will increase net cash flow by $13,000 per year for each of the 4 years that the equipment is in use. Production Process B also requires an initial investment of $25,000, will also last 4 years, and its expected net salvage value is zero, but Process B will increase net cash flow by $15,247 per year. Management believes that a risk-adjusted discount rate of 12 percent should be used for Process A. If ABC Mining is to be indifferent between the two processes, what risk-adjusted discount rate must be used to evaluate B?

Question

Show your work!

Answer 1

Risk-adjusted discount rate Answer: e Diff: M




A: Inputs: CF0 = -25000; CF1 = 13000; Nj = 3; CF2 = 18000; I = 12.
Output: NPVA = 17,663.13.

B: Inputs: CF0 = -42663.13 (-25000 + -17663.13); CF1 = 15247; Nj = 4.
Output: IRR = 16.0% = k.

Risk-adjusted discount rate Answer: e Diff: M

Answer 2

can any one further explain calculation on project B

Answer 3

16%

Answer 4

15%

Answer 5

Apart from using scientific calculator is there any method to use in finding of that 16%