Question

Blossom Corp. management is investigating two computer systems. The Alpha 8300 costs $2,448,125 and will generate cost savings of $1,253,325 in each of the next five years. The Beta 2100 system costs $3,387,500 and will produce cost savings of $921,750 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

Answer 1

Net Present Value (NPV) of Alpha System

Year	Annual Cash Flow ($)	Present Value factor at 14%	Present Value of Cash Flow ($)
1	12,53,325	0.877193	10,99,408
2	12,53,325	0.769468	9,64,393
3	12,53,325	0.674972	8,45,959
4	12,53,325	0.592080	7,42,069
5	12,53,325	0.519369	6,50,938
TOTAL			4,302,766

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $4,302,766 - $2,448,125

= $1,854,641

Net Present Value (NPV) of Beta System

Year	Annual Cash Flow ($)	Present Value factor at 14%	Present Value of Cash Flow ($)
1	9,21,750	0.877193	8,08,553
2	9,21,750	0.769468	7,09,257
3	9,21,750	0.674972	6,22,155
4	20,00,000	0.592080	11,84,161
5	20,00,000	0.519369	10,38,737
TOTAL			4,362,862

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $4,362,862 - $3,387,500

= $975,362

NOTE

The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)ⁿ], where “r” is the Discount Rate/Cost of capital and “n” is the number of years.