Question

The engineering team at Manuel’s Manufacturing, Inc. is planning to purchase an Enterprise Resource Planning (ERP) system. The software and installation from Vendor A costs $360,000 initially and is expected to increase revenue $120,000 per year every year. The software and installation from Vendor B costs $260,000 and is expected to increase revenue $90,000 per year. Manuel’s uses a 4 year planning horizon and a 10% per year MARR. Based on an internal rate of return analysis which ERP system should Manuel Purchase?

Answer 1

IRR is the rate at which Present value of Cash inflows is equal to Present Value of Cash outflows. It means NPV is zero at IRR rate.
Year	Vendor A		Vendor B
	Cash flows		Cash flows
0	-360000	(L33)	-260000	(N33)
1	120000	(L34)	90000	(N34)
2	120000	(L35)	90000	(N35)
3	120000	(L36)	90000	(N36)
4	120000	(L37)	90000	(N37)
IRR =	12.59%		14.42%
IRR function=	IRR(L33:L37,10)			IRR(N33:N37,10)
IRR of both ERP systems is greater than MARR 10%. But ERP software from Vendor B I.R.R. is 14.42% greater than Vendor A installation.
So, ERP systems from Vendor B should be purchased.
So, IRR of project is 22.52%
				IRR is the rate at which Present value of Cash inflows is equal to Present Value of Cash outflows. It means NPV is zero at IRR rate.
				Year	Vendor A		Vendor B
					Cash flows		Cash flows
				0	-360000	(L33)	-260000	(N33)
				1	120000	(L34)	90000	(N34)
				2	120000	(L35)	90000	(N35)
				3	120000	(L36)	90000	(N36)
				4	120000	(L37)	90000	(N37)
				IRR =	12.59%		14.42%
				IRR function=	IRR(L33:L37,10)			IRR(N33:N37,10)
				IRR of both ERP systems is greater than MARR 10%. But ERP software from Vendor B I.R.R. is 14.42% greater than Vendor A installation.
				So, ERP systems from Vendor B should be purchased.
				So, IRR of project is 22.52%