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Suva Mining is evaluating the introduction of a new ore production process. Two alternatives are available.
Suva Mining is evaluating the introduction of a new ore production process. Two alternatives are available. Production process X has an initial cost of $25000, a 4-year life and a $5000 net salvage value and the use of Process X will increase net flow by $13000 per year for each of the 4 years that the equipment is in use. Production Process Y also requires an initial investment of $25000, will also last 4 years and its expected salvage value is zero, but Process Y will increase the net cash flow by $15247 per year. Management believes that a risk adjusted discount rate of 12% should be used for Process X.
If Suva Mining is to be indifferent between the two processes, what risk adjusted discount rate must be used to evaluate Y?