Question

Ivanhoe Mills management is evaluating two alternative heating systems. Costs and projected energy savings are given in the following table. The firm uses 11.5 percent to discount such project cash flows. Year System 100 System 200 0 –$1,567,200 –$2,052,600 1 210,710 576,300 2 541,030 691,700 3 646,840 520,000 4 925,700 326,900 What is the NPV of the systems? (Enter negative amounts using negative sign, e.g. -45.25. Do not round discount factors and intermediate calculations. Round final answers to 0 decimal places, e.g. 5,275.) NPV of system 100 is $ NPV of system 200 is $ Which system should be chosen? Ivanhoe should choose

Answer 1

Ans NPV of System 100 : $ 122512.58

NPV of System 200:   - $ 392733.62

System 100 should be chosen since it has higher NPV.

System 100
Year	Project Cash Flows (i)	DF@ 11.5%	DF@ 11.5% (ii)	PV of Project ( (i) * (ii) )
0	-1567200	1	1	(15,67,200.00)
1	210710	1/((1+11.5%)^1)	0.897	1,88,977.58
2	541030	1/((1+11.5%)^2)	0.804	4,35,182.69
3	646840	1/((1+11.5%)^3)	0.721	4,66,629.58
4	925700	1/((1+11.5%)^4)	0.647	5,98,922.73
		NPV		1,22,512.58

System 200
Year	Project Cash Flows (i)	DF@ 11.5%	DF@ 11.5% (ii)	PV of Project ( (i) * (ii) )
0	-2052600	1	1	(20,52,600.00)
1	576300	1/((1+11.5%)^1)	0.897	5,16,860.99
2	691700	1/((1+11.5%)^2)	0.804	5,56,375.56
3	520000	1/((1+11.5%)^3)	0.721	3,75,127.36
4	326900	1/((1+11.5%)^4)	0.647	2,11,502.47
		NPV		(3,92,733.62)