Question

Problem 10.25

Carla Vista 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 9 percent discount rate for production systems.

Year			System 1			System 2
0			-$12,010			-$49,910
1			12,080			33,930
2			12,080			33,930
3			12,080			33,930

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 2System 1 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?

System 1System 2 has higher NPV.

Answer 1

Solution :-

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