Question: Discount Rates, Automated Manufacturing, Competing Investments Patterson Company is considering two competing investments. The first is for a standard piece of production equipment. The second is for computer-aided manufacturing (CAM) equipment. The investment and after-tax operating cash flows follow:
Patterson uses a discount rate of 18 percent for all of its investments. Patterson's cost of capital is 10 percent.
Required: 1. Calculate the NPV for each investment by using a discount rate of 18 percent.
2. Calculate the NPV for each investment by using a discount rate of 10 percent.
3. Conceptual Connection: Which rate should Patterson use to compute the NPV? Explain.