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,

Compute the IRR for both production system 1 and production system 2

Compute the NPV for both production system 1 and production system 2

Which production system has the higher NPV?

Year System 1 System 2 0 -$13,100 -$46,212 1 13,136 32,300 2 13,136 32,300 3 13,136 32,300

Explanation / Answer

Rate of return 9.00% Case -> Sys 1 Sys 2 Choice by this method Formula Year Cash flow PV of cash flow Cash flow PV of cash flow Cash flow PV of Cash flow 0 ($13,100) $ (13,100.00) ($46,212) $(46,212.00) A A/(1+r)^0 1 13,136 $   12,051.38 32,300 $ 29,633.03 B B/(1+r)^1 2 13,136 $   11,056.31 32,300 $ 27,186.26 C C/(1+r)^2 3 13,136 $   10,143.40 32,300 $ 24,941.53 D D/(1+r)^3 4 $              -   $            -   E E/(1+r)^4 NPV $20,151.09 $35,548.82 A Sum of above PVs of cash flow IRR 84.24% (Higher IRR) 48.59% B r if npv = 0

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