9 10-25 Blanda Incorporated management is considering investing in two alternati

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%.) IRR of system 1 is % and IRR of system 2 is %. Which has the higher IRR? has higher IRR. Has 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.) NPV of system 1 is $ and NPV of system 2 $ Which production system has the higher NPV? -B has higher NPV. has higher NPV.

Explanation / Answer

Use excel function =IRR(cash flows)

System 1 has higher IRR of 83.93%

System 1 NPV=-12000+12000/1.07^1+12000/1.07^2+12000/1.07^3=19491.79

System 2 NPV=-44799+30000/1.07^1+30000/1.07^2+30000/1.07^3=33930.48

System 2 has higher NPV

Year System 1 System 2 0 -12000 -44799 1 12000 30000 2 12000 30000 3 12000 30000 IRR 83.93% 45.00%

Related Questions

Navigate

• Browse (All)
• Browse 9
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.