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 10 percent discount rate for production system projects. Year System 1 System 2 O -$12,500 -$45,100 1 12,500 30,800 N 12,500 30,800 12,500 w 30,800 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

Date System 1 Sol- year o CF($) (12500) o 12500 PVf@10% P.v . 1 (12500) 0-90909 11363.6363 082644610330.5785 0.7513148 939)-4356 3 2 12500 12500 18585.6498 NPU On $18585.65) 18585.651 * year System 2 CF ($) (45,100) 30,800 30,800 30,800 Puf@10% PU & 1 145,100) 0.90909 28,000 0.826446 25 454.5458 0.7513148 23140,496 NPU 31495.0408 07 $ 31495,047

Profitability Index = p. V of cash inflowe Initkel Investment = 31085,65 12500 = 2.4868 us, loo system2 - 76595.04 -1.698 since pl of systems is more then Systemk's pl. Therefore the firm should invest in System 1. 11