Question

Cullumber 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 9 percent discount rate for their production systems.

Year			System 1			System 2
0			-$15,100			-$42,300
1			15,100			30,800
2			15,100			30,800
3			15,100			30,800

What are the payback periods for production systems 1 and 2? (Round answers to 2 decimal places, e.g. 15.25.)

Payback period of System 1 is  years and Payback period of System 2 is  years.

Ivanhoe 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			-$13,800			-$43,800
1			13,800			30,900
2			13,800			30,900
3			13,800			30,900

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 $enter the NPV of System 1 in dollars rounded to 2 decimal places  and NPV of System 2 is $enter the NPV of System 2 in dollars rounded to 2 decimal places  .

Answer 1

(1)

For System 1,

Payback period = initial investment/annual net cash flow

= $15100/$15100

= 1 year

for System 2,

Payback period = initial investment/annual net cash flow

= $42300/$30800

= 1.37 year

(2)

For System 1,

Net present value = present value of annual net cash flow - initial investment

= ($13800 x 2.62432) - $13800

= $36215.62 - $13800

= $22415.62

Where,

PVAF(7%, 3) = 2.62432

For System 2,

Net present value = present value of annual net cash flow - initial investment

= ($30900 x 2.62432) - $43800

= $81091.49 - $43800

= $37291.49

Where,

PVAF(7%, 3) = 2.62432