Question

As the manager of the pension fund, you are frequently targeted by software companies peddling investment simulation software. You have finally narrowed down your choice to two applications. You need to analyze the options by calculating NPV, IRR and Payback Period based on their purchase price and savings to your company over time. Your staff has prepared a cash-flow table to help you. Year zero shows the purchase price of each application, and the figures listed for years 1-3 represent the savings to the company in successive years. Year Application I Application II 0 (today) -$500,000 -$800,000 1 $400,000 $500,000 2 $700,000 $740,000 3 $470,000 $600,000 You are trying to decide which Application to use and will choose the Application that has a larger NPV. Calculate the NPV of both Applications if the required rate of return is 10.22 percent. Now as your answer, write the NPV for the chosen Application.

Answer 1

NPV-Application1
Year	Cashflows	PVF at 10.22%	Present values
0	-500000	1	-500000
1	400000	0.907276	362910.5
2	700000	0.82315	576205.3
3	470000	0.746825	351007.7
NPV-Application1			790123.5
NPV -Application2
Year	Cashflows	PVF at 10.22%	Present values
0	-800000	1	-800000
1	500000	0.907276	453638.2
2	740000	0.82315	609131.3
3	600000	0.746825	448094.9
NPV -Application2			710864.4
Answer is NPV of Application-1: $ 790123.50