Question

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 8 percent discount rate for production systems.

Year			System 1			System 2
0			-$12,490			-$44,703
1			12,536			30,270
2			12,536			30,270
3			12,536			30,270

Compute the IRR for both production system 1 and production system 2. (Do not round intermediate calculations. Round answers to 2 decimal places, e.g. 15.25%.)

IRR of system 1 is enter the IRR of System 1 in percentages rounded to 2 decimal places   % ?

and IRR of system 2 is enter the IRR of System 2 in percentages rounded to 2 decimal places   %.?

Which has the higher IRR?

select a system                                                          System 2System 1 has higher IRR.

Compute the NPV for both production system 1 and production system 2. (Do not round intermediate calculations. 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 $enter the NPV of System 2 in dollars rounded to 2 decimal places ?.

Which production system has the higher NPV?

Answer 1

Solution :

The IRR of Production System 1 = 84.35 %

The IRR of Production System 2 = 45.92 %

Production System 1 has higher IRR of 84.35 %

The NPV of Production System 1 = $ 19,816.49

The NPV of Production System 2 = $ 33,305.73

Production System 2 has higher NPV = $ 33,305.73

Please find the attached screenshots of the excel sheet containing the detailed calculation for the solution.