Dean Consulting is considering purchasing two different types of servers. Server A will generate net cash inflows of $20,000 per year and have a zero residual value. Server A’s estimated useful life is three years and it costs $36,000.
Server B will generate net cash inflows of $20,000 in year 1, $12,000 in year 2, and $4,000 in year 3. Server B has a $5,000 residual value and an estimated life of three years. Server B also costs $36,000. Dean required rate of return is 16 %.
Requirements
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1. |
Calculate payback, accounting rate of return, net present value, and internal rate of return for both server investments. Use Microsoft Excel to calculate NPV and IRR. |
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2. |
Assuming capital rationing applies, which server should Dean invest in? |
