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NPV Versus IRR Covington Pharmacies has decided to automate its insurance claims process. Two networked computer systems are being considered. The systems have an expected life of two years. The net cash flows associated with the systems are as follows. The cash benefits represent the savings created by switching from a manual to an automated system. Year System I System II 0 $(120,000) $(120,000) 1 2 162,708 76,628 76,628 The company's cost of capital is 10 percent. The present value tables provided in Exhibit 198.1 and Exhibit 19B.2 must be used to solve the following problems. Required: 1. Compute the NPV and the IRR for each investment. If required, round intermediate calculations and NPV to the nearest dollar and round IRR percentages to one decimal place (for example, 15.68% rounds to 15.7% and should be entered as "15.7" in the answer box). NPV IRR System I System II 2. Why is the project with the larger NPV the correct choice for the company? Its future value is higher, so its selection maximizes the value of the firm Its IRR is higher, so its selection maximizes the value of the firm In this case, the project with the higher NPV is not the correct choice

NPV Versus IRR Covington Pharmacies has decided to automate its insurance claims process. Two networked computer systems are being considered. The systems have an expected life of two years. The net cash flows associated with the systems are as follows. The cash benefits represent the savings created by switching from a manual to an automated system. Year System I System II 0 $(120,000) $(120,000) 1 2 162,708 76,628 76,628 The company's cost of capital is 10 percent. The present value tables provided in Exhibit 198.1 and Exhibit 19B.2 must be used to solve the following problems. Required: 1. Compute the NPV and the IRR for each investment. If required, round intermediate calculations and NPV to the nearest dollar and round IRR percentages to one decimal place (for example, 15.68% rounds to 15.7% and should be entered as "15.7" in the answer box). NPV IRR System I System II 2. Why is the project with the larger NPV the correct choice for the company? Its future value is higher, so its selection maximizes the value of the firm Its IRR is higher, so its selection maximizes the value of the firm In this case, the project with the higher NPV is not the correct choice

Cornerstones of Cost Management (Cornerstones Series)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 16E: Covington Pharmacies has decided to automate its insurance claims process. Two networked computer...
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NPV Versus IRR Covington Pharmacies has decided to automate its insurance claims process. Two networked computer systems are being considered. The systems have an expected life of two years. The net cash flows associated with the systems are as follows. The cash benefits represent the savings created by switching from a manual to an automated system. Year System I System II 0 $(120,000) $(120,000) 1 2 162,708 76,628 76,628 The company's cost of capital is 10 percent. The present value tables provided in Exhibit 198.1 and Exhibit 19B.2 must be used to solve the following problems. Required: 1. Compute the NPV and the IRR for each investment. If required, round intermediate calculations and NPV to the nearest dollar and round IRR percentages to one decimal place (for example, 15.68% rounds to 15.7% and should be entered as "15.7" in the answer box). NPV IRR System I System II 2. Why is the project with the larger NPV the correct choice for the company? Its future value is higher, so its selection maximizes the value of the firm Its IRR is higher, so its selection maximizes the value of the firm In this case, the project with the higher NPV is not the correct choice
Transcribed Image Text:NPV Versus IRR Covington Pharmacies has decided to automate its insurance claims process. Two networked computer systems are being considered. The systems have an expected life of two years. The net cash flows associated with the systems are as follows. The cash benefits represent the savings created by switching from a manual to an automated system. Year System I System II 0 $(120,000) $(120,000) 1 2 162,708 76,628 76,628 The company's cost of capital is 10 percent. The present value tables provided in Exhibit 198.1 and Exhibit 19B.2 must be used to solve the following problems. Required: 1. Compute the NPV and the IRR for each investment. If required, round intermediate calculations and NPV to the nearest dollar and round IRR percentages to one decimal place (for example, 15.68% rounds to 15.7% and should be entered as "15.7" in the answer box). NPV IRR System I System II 2. Why is the project with the larger NPV the correct choice for the company? Its future value is higher, so its selection maximizes the value of the firm Its IRR is higher, so its selection maximizes the value of the firm In this case, the project with the higher NPV is not the correct choice
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