Green Energy Co. (GEC), an environmental energy company, is looking to purchase a new methane burning furnace, and wants to evaluate two different models that both have a useful life of 5 years. GEC requires a 12 percent return on investment. Assume cash flows noted below are net of tax. The cash flows associated with the two models are as follows: Year Model A Model B Initial Cost (Cash outflow) 0 -$340,000 -$175,000 Cash Flow Year 1 1 $165,000 $65,000 Cash Flow Year 2 2 $120,000 $60,000 Cash Flow Year 3 3 $90,000 $40,000 Cash Flow Year 4 4 $60,000 $35,000 Cash Flow Year 5 5 $30,000 $40,000 Calculate on excel: If you apply the payback criterion, which investment should GEC choose? Why? If you apply the NPV criterion, which investment should GEC choose? Why? If you apply the IRR criterion, which investment should GEC choose? Why?
Green Energy Co. (GEC), an environmental energy company, is looking to purchase a new methane burning furnace, and wants to evaluate two different models that both have a useful life of 5 years. GEC requires a 12 percent return on investment. Assume cash flows noted below are net of tax. The cash flows associated with the two models are as follows: Year Model A Model B Initial Cost (Cash outflow) 0 -$340,000 -$175,000 Cash Flow Year 1 1 $165,000 $65,000 Cash Flow Year 2 2 $120,000 $60,000 Cash Flow Year 3 3 $90,000 $40,000 Cash Flow Year 4 4 $60,000 $35,000 Cash Flow Year 5 5 $30,000 $40,000 Calculate on excel: If you apply the payback criterion, which investment should GEC choose? Why? If you apply the NPV criterion, which investment should GEC choose? Why? If you apply the IRR criterion, which investment should GEC choose? Why?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Green Energy Co. (GEC), an environmental energy company, is looking to purchase a new methane burning furnace, and wants to evaluate two different models that both have a useful life of 5 years. GEC requires a 12 percent
The cash flows associated with the two models are as follows:
| Year | Model A | Model B | |
| Initial Cost ( |
0 | -$340,000 | -$175,000 |
| Cash Flow Year 1 | 1 | $165,000 | $65,000 |
| Cash Flow Year 2 | 2 | $120,000 | $60,000 |
| Cash Flow Year 3 | 3 | $90,000 | $40,000 |
| Cash Flow Year 4 | 4 | $60,000 | $35,000 |
| Cash Flow Year 5 | 5 | $30,000 | $40,000 |
Calculate on excel:
- If you apply the payback criterion, which investment should GEC choose? Why?
- If you apply the
NPV criterion, which investment should GEC choose? Why? - If you apply the
IRR criterion, which investment should GEC choose? Why?
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