Question

Wildhorse 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. The firm uses a 7 percent discount rate for production systems.

Year System 1 System 2

0 -$15,080 -$47,448

1 15,294 33,300

2 15,294 33,300

3 15,294 33,300

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? (System 1/ System 2)

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 is $___________.

Which production system has the higher NPV? (System 1/ System 2)

Answer 1

Solution :

IRR of system 1 is 85.54 % and IRR of system 2 is 48.94 %.

System 1 has higher IRR of 85.54 %

NPV of system 1 is $ 25,056.29 and NPV of system 2 is $ 39,941.72

System 2 has higher NPV of $ 39,941.72

Please find the attached screenshots of the excel sheet containing the detailed calculation for the solution.