IRR is the Rate at which PV of Cash Inflows are equal to PV of Cash Outflows.
System 1:
Year | CF | PVF @85% | Disc CF | PVF @86% | Disc CF |
0 | $ -13,500.00 | 1.0000 | $ -13,500.00 | 1.0000 | $ -13,500.00 |
1 | $ 13,732.00 | 0.5405 | $ 7,422.70 | 0.5376 | $ 7,382.80 |
2 | $ 13,732.00 | 0.2922 | $ 4,012.27 | 0.2891 | $ 3,969.24 |
3 | $ 13,732.00 | 0.1579 | $ 2,168.80 | 0.1554 | $ 2,134.00 |
NPV | $ 103.77 | $ -13.96 |
IRR = Rate at which least +ve NPV + [ NPV at that Rate / Change in NPV due to 1% inc in Rate ] * 1%
= 85% + [ 103.77 / 117.73 ] * 1%
= 85% +0.88%
= 85.88%
System2:
Year | CF | PVF @45% | Disc CF | PVF @46% | Disc CF |
0 | $ -44,796.00 | 1.0000 | $ -44,796.00 | 1.0000 | $ -44,796.00 |
1 | $ 30,300.00 | 0.6897 | $ 20,896.55 | 0.6849 | $ 20,753.42 |
2 | $ 30,300.00 | 0.4756 | $ 14,411.41 | 0.4691 | $ 14,214.67 |
3 | $ 30,300.00 | 0.3280 | $ 9,938.91 | 0.3213 | $ 9,736.08 |
NPV | $ 450.87 | $ -91.82 |
IRR = Rate at which least +ve NPV + [ NPV at that Rate / Change in NPV due to 1% inc in Rate ] * 1%
= 45% + [ 450.87 / 542.70 ] * 1%
= 45% +0.83%
= 45.83%
System 1 is selected as it has higher IRR
NPV = Pv of cash Inflows - PV of Cash outflows
System1:
Year | CF | PVF @9% | Disc CF |
0 | $ -13,500.00 | 1.0000 | $ -13,500.00 |
1 | $ 13,732.00 | 0.9174 | $ 12,598.17 |
2 | $ 13,732.00 | 0.8417 | $ 11,557.95 |
3 | $ 13,732.00 | 0.7722 | $ 10,603.62 |
NPV | $ 21,259.74 |
System 2:
Year | CF | PVF @9% | Disc CF |
0 | $ -44,796.00 | 1.0000 | $ -44,796.00 |
1 | $ 30,300.00 | 0.9174 | $ 27,798.17 |
2 | $ 30,300.00 | 0.8417 | $ 25,502.90 |
3 | $ 30,300.00 | 0.7722 | $ 23,397.16 |
NPV | $ 31,902.23 |
System 2 is selected as it has higher NPV.
Blanda Incorporated management is considering investing in two alternative production systems. The systems are mutually exclusive,...
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