Blanda Incorporated management is considering investing in two alternative produ

Question

Blanda Incorporated management is considering investing in two alternative production systems. The systems are mutually exclusive, and the cost of the new equipment and the resulting cash flows are shown in the accompanying table. If the firm uses a 9 percent discount rate for their production systems,

Year System 1 System 2
0 -$15,600 -$44,486
1 15,834 30,500
2 15,834 30,500
3 15,834 30,500

Compute the IRR for both production system 1 and production system 2. (Round answers to 2 decimal places, e.g. 15.25.)

IRR of system 1 is -? % and IRR of system 2 is -? %.

Which has the higher IRR?
System 2 or

System 1

Compute the NPV for both production system 1 and production system 2. (Round answers to 2 decimal places, e.g. 15.25 or 15.25%.)

NPV of system 1 is -? $ and NPV of system 2 -? $ .

Which production system has the higher NPV?

System 1 or
System 2

Explanation / Answer

Rate 9% System 1 System 2 Formula 1 Cash flow PV of cash flow Cash flow PV of cash flow PV of Cash flow A 0 -15600 -15600 -44486 -44486 A/(1+r)^0 B 1 15834 14526.6055 30500 27981.65138 B/(1+r)^1 C 2 15834 13327.16101 30500 25671.23979 C/(1+r)^2 D 3 15834 12226.75322 30500 23551.59614 D/(1+r)^3 Answer NPV $24,480.52 $32,718.49 Sum of above PVs of cash flow Higher NPV for System 2! IRR 85.63% 46.96% r Higher IRR for system 1

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