Question

Blossom Corp. management is investigating two computer systems. The Alpha 8300 costs $3,006,625 and will generate cost savings of $1,548,725 in each of the next five years. The Beta 2100 system costs $4,627,500 and will produce cost savings of $1,177,750 in the first three years and then $2 million for the next two years. The company’s discount rate for similar projects is 14 percent.

What is the NPV of each system? (Enter negative amounts using negative sign, e.g. -45.25. Do not round discount factors. Round other intermediate calculations and final answer to 0 decimal places, e.g. 1,525.)

NPV of Alpha system _____

NPV of Beta system _____

Which one should be chosen based on the NPV? Blossom should chose the _______ system.

Answer 1

Solution :

NPV of Alpha system = $ 2,310,273

NPV of Beta system = $ 329,700

The NPV of Alpha System at $ 2,310,273 is higher than that of Beta System at $ 329,700

Thus Alpha System with higher NPV of $ 2,310,273 should be chosen based on NPV.

Blossom should chose the Alpha 8300 system.

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