Question

Pharoah 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 7 percent discount rate for production system projects.

Year System 1 System 2

0 - 12,200 - 42,900

1 12,200 30,200

2 12,200 30,200

3 12,200 30,200

Calculate NPV. (Enter negative amounts using negative sign, e.g. -45.25. Do not round discount factors. Round answers to 2 decimal places, e.g. 15.25.)

NPV of System 1 is: $   

and NPV of System 2 is: $

Answer 1

Ans NPV of System 1 is: $ 19816.66

and NPV of System 2 is: $ 36354.34

SYSTEM 1
Year	Project Cash Flows (i)	DF@ 7%	DF@ 7% (ii)	PV of Project ( (i) * (ii) )
0	-12200	1	1	(12,200.00)
1	12200	1/((1+7%)^1)	0.935	11,401.87
2	12200	1/((1+7%)^2)	0.873	10,655.95
3	12200	1/((1+7%)^3)	0.816	9,958.83
		NPV		19,816.66

SYSTEM 2
Year	Project Cash Flows (i)	DF@ 7%	DF@ 7% (ii)	PV of Project ( (i) * (ii) )
0	-42900	1	1	(42,900.00)
1	30200	1/((1+7%)^1)	0.935	28,224.30
2	30200	1/((1+7%)^2)	0.873	26,377.85
3	30200	1/((1+7%)^3)	0.816	24,652.20
		NPV		36,354.34