Both Old Line Industries and New Tech, Inc., use the IRR to make investment decisions. Both fi rms are considering investing in a more efficient $4.5 million mail-order processor. This machine could generate after-tax savings of $2 million per year over the next three years for both fi rms. However, due to the risky nature of its business, New Tech has a much higher cost of capital (20 percent) than does Old Line (10 percent). Given this information, answer parts (a)–(c).
a. Should Old Line invest in this processor?
b. Should New Tech invest in this processor?
c. Based on your answers in parts (a) and (b), what can you infer about the acceptability of projects across firms with different costs of capital?
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