9 -10.25 Blanda Incorporated management is considering investing in two alternat
ID: 2725839 • Letter: 9
Question
9 -10.25
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 7 percent discount rate for production systems. Compute the IRR for both production system 1 and production system 2. (Do not round intermediate calculations. Round answers to 2 decimal places, e.g. 15.25%.) Which has the higher IRR? Compute the NPV for both production system 1 and production system 2. (Do not round intermediate calculations. Round answers to 2 decimal places, e.g. 15.25.)Explanation / Answer
calculation of irr of the production plans year system 1 present value rate factor at 7 % present value amounts system 2 present value rate factor at 7 % present value amounts 0 -12000 1.0000 -12000.00 -44799 1.0000 -44799.00 1 12000 0.9346 11214.95 3000 0.9346 2803.74 2 12000 0.8734 10481.26 30000 0.8734 26203.16 3 12000 0.8163 9795.57 30000 0.8163 24488.94 total 19491.79 8696.84 irr of the normal cash flows of system 1 year 0 1 2 3 system 1 -12000 12000 12000 12000 irr in excel formula . = irr ( c15 to f15) 84% irr of the discounted cash flows of system 1 year 0 1 2 3 present value amounts -12000 11214.95 10481.26 9795.57 irr in excel formula . = irr ( c15 to f15) 72% irr of the normal cash flows of system 1 year 0 1 2 3 system 2 -44799 3000 30000 30000 irr in excel formula . = irr ( c15 to f15) 15% irr of the normal cash flows of system 1 year 0 1 2 3 present value amounts -44799 2803.74 26203.16 24488.94 irr in excel formula . = irr ( c15 to f15) 8% decision system 1 has the higher irr 84 % calculation of net present value net present value present value of cash flows - cost of investment year present value amounts system 1 present value amounts system 2 1 11214.95 2803.74 2 10481.26 26203.16 3 9795.57 24488.94 total 31491.79 53495.84 cost of investment of system 1 -12000 cost of investment of system 2 -44799 net present value of system 1 31491.79 -12000 net present value of system 1 19491.79 net present value of system 2 53495.83 - 44799 net present value of system 2 8696.83 decision system 1 has the higher irr 19491.79
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