Chapter 5 Net Present Value and Other Investment Criteria 131
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You: It’s not clear which project is better. The high-temperature process appears to be less effi-
cient. It has higher operating costs and generates less total revenue over the life of the project,
but of course it generates more cash flow in years 1 to 5.
CFO: Maybe the processes are equally good from a financial point of view. If so we’ll stick with
the low-temperature process rather than switching at the last minute.
You: We’ll have to lay out the cash flows and calculate NPV for each process.
CFO: OK, do that. I’ll be back in a half hour—and I also want to see each project’s true, DCF rate
of return.
QUESTIONS
- Are the book rates of return reported in Tables 5.1 and 5.2 useful inputs for the capital invest-
ment decision? - Calculate NPV and IRR for each process. What is your recommendation? Be ready to explain
to the CFO.