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 - 76,628

2 162,708 76,628

The company’s cost of capital is 10 percent. The present value tables provided in Exhibit 19B.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).

System 1 System 2

NPV $ $

IRR % %

2. Why is the project with the larger NPV the correct choice for the company?
Transcribed Image Text:EXHIBIT 19B.2 Periods 2% 1 2 3 4 5 6 8 9 DHZBHRFN28 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 29 30 4% *P₁ = (1/1) × [1-1/(1+0. Present Value of an Annuity of $1 in Arrears* 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% 32% 40% 2.168 2.263 2.331 2.379 2.414 2.438 2.456 1.690 2.402 3.037 3.605 5.601 5.242 4.917 4.111 6.472 6.002 5.582 5.206 4.868 4.564 7.325 6.733 6.210 5.747 5.335 4.968 8.162 7.435 6.802 6.247 5.759 5.328 8.983 8.111 7.360 6.710 6.145 5.650 9.787 8.760 7.887 7.139 6.495 5.938 10.575 9.385 8.384 7.536 6.814 6.194 11.348 9.986 8.853 7.904 7.103 6.424 12.106 10.563 9.295 8.244 7.367 6.628 12.849 11.118 9.712 8.559 7.606 6.811 13.578 11.652 10.106 8.851 7.824 6.974 14.292 12.166 10.477 9.122 8.022 7.120 14.992 12.659 10.828 9.372 8.201 7.250 15.678 13.134 11.158 9.604 8.365 7.366 16.351 13.590 11.470 9.818 8.514 7.469 17.011 14.029 11.764 10.017 8.649 7.562 17.658 14.451 12.042 10.201 8.772 7.645 18.292 14.857 12.303 10.371 10.371 8.883 7.718 18.914 15.247 12.550 10.529 8.985 7.784 19.523 15.622 12.783 10.675 9.077 7.843 20.121 15.983 13.003 10.810 9.161 7.896 20.707 16.330 13.211 10.935 9.237 7.943 21.281 16.663 13.406 11.051 11.051 9.307 7.984 21.844 16.984 13.591 11.158 9.370 8.022 22.396 17.292 13.765 11.258 9.427 8.055 0.980 0.962 0.943 0.926 0.909 0.893 0.877 0.862 0.847 0.833 0.820 0.806 0.794 0.781 0.769 0.758 0.714 1.942 1.866 1.833 1.783 1.736 1.647 1.605 1.566 1.528 1.492 1.457 1.424 1.392 1.361 1.331 1.224 2.884 2.775 2.673 2.577 2.487 2.322 2.246 2.174 2.106 2.042 1.981 1.923 1.868 1.816 1.766 1.589 3.808 3.630 3.465 3.312 3.170 2.914 2.798 2.690 2.589 2.494 2.404 2.320 2.241 2.166 2.096 1.849 4.713 4.452 4.212 3.993 3.791 3.433 3.274 3.127 2.991 2.864 2.745 2.635 2.532 2.436 2.345 2.035 4.623 4.355 3.889 3.685 3.498 3.326 3.167 3.020 2.885 2.759 2.643 2.534 4.288 4.039 3.812 3.605 3.416 3.242 3.083 2.937 2.802 2.677 4.639 4.344 3.078 3.837 3.619 3.421 3.241 3.076 2.925 2.786 4.946 4.607 4.303 4.031 3.786 3.566 3.366 3.184 3.019 2.868 5.216 4.833 4.494 4.192 3.923 3.682 3.465 3.269 3.092 2.930 5.453 5.029 4.656 4.327 4.035 3.776 3.543 3.335 3.147 2.978 5.660 5.197 4.793 4.439 4.127 3.851 3.606 3.387 3.190 3.013 5.842 5.342 4.910 4.533 4.203 3.912 3.656 3.427 3.223 3.040 6.002 5.468 5.008 4.611 4.265 3.962 3.695 3.459 3.249 3.061 6.142 5.575 5.092 4.675 4.315 4.001 3.726 3.483 3.268 3.076 6.265 5.668 5.162 4.730 4.357 4.033 3.751 3.503 3.283 3.088 6.373 5.749 5.222 4.775 4.391 4.059 3.771 3.518 3.295 3.097 6.467 5.818 5.273 4.812 4.419 4.080 3.786 3.529 3.304 3.104 2.494 6.550 5.877 5.316 4.843 4.442 4.097 3.799 3.539 3.311 3.109 2.496 6.623 5.929 5.353 4.870 4.460 4.110 3.808 3.546 3.316 3.113 2.497 6.687 5.973 5.384 4.891 4.476 4.121 3.816 3.551 3.320 3.116 6.743 6.011 5.410 4.909 4.488 4.130 3.822 3.556 3.323 3.118 6.792 6.044 5.432 4.925 4.499 4.137 3.827 3.559 3.325 3.120 6.835 6.073 5.451 4.937 4.507 4.143 3.831 3.562 3.327 3.121 6.873 6.097 5.467 4.948 4.514 4.147 3.834 3.564 3.329 3.122 6.906 6.118 5.480 4.956 4.520 4.151 3.837 3.566 3.330 3.123 6.935 6.136 5.492 4.964 4.524 4.154 3.839 3.567 3.331 3.123 6.961 6.152 5.502 4.970 4.528 4.157 3.840 3.568 3.331 3.124 2.500 6.983 6.166 5.510 4.975 4.531 4.159 3.841 3.569 3.332 3.124 2.500 7.003 6.177 5.517 4.979 4.534 4.160 3.842 3.569 3.332 3.124 2.500 2.469 2.478 2.484 2.489 2.492 2.498 2.498 2.499 2.500 2.499 2.499 2.500
Transcribed Image Text:EXHIBIT 19B.1 1 2 Periods 2% 20% 22% 24% 26% 28% 0.769 0.758 0.592 0.574 0.455 0.435 0.714 0.510 0.364 0.350 0.329 0.006 0.980 0.962 0.943 0.926 0.909 0.893 0.877 0.862 0.847 0.833 0.820 0.806 0.794 0.781 0.961 0.925 0.890 0.857 0.826 0.797 0.769 0.743 0.718 0.694 0.672 0.650 0.630 0.610 0.942 0.889 0.840 0.794 0.751 0.712 0.675 0.641 0.609 0.579 0.551 0.524 0.500 0.477 0.924 0.855 0.792 0.735 0.683 0.636 0.592 0.552 0.516 0.482 0.451 0.423 0.397 0.373 0.260 0.906 0.822 0.747 0.681 0.621 0.567 0.519 0.476 0.437 0.402 0.370 0.341 0.315 0.291 0.269 0.250 0.186 0.888 0.790 0.705 0.636 0.564 0.507 0.456 0.410 0.370 0.335 0.303 0.275 0.250 0.227 0.207 0.189 0.133 0.871 0.760 0.665 0.583 0.513 0.452 0.400 0.354 0.314 0.279 0.249 0.222 0.198 0.178 0.159 0.143 0.095 0.853 0.731 0.627 0.540 0.467 0.404 0.351 0.305 0.266 0.233 0.204 0.179 0.157 0.139 0.123 0.108 0.068 0.837 0.703 0.592 0.500 0.424 0.361 0.308 0.263 0.225 0.194 0.167 0.144 0.125 0.108 0.094 0.082 0.048 0.820 0.676 0.558 0.463 0.386 0.322 0.270 0.227 0.191 0.162 0.137 0.116 0.099 0.085 0.073 0.062 0.035 0.804 0.650 0.527 0.429 0.350 0.287 0.237 0.195 0.162 0.135 0.112 0.094 0.079 0.066 0.056 0.046 0.025 0.788 0.625 0.497 0.397 0.319 0.257 0.208 0.168 0.137 0.112 0.092 0.076 0.062 0.052 0.043 0.036 0.018 0.773 0.601 0.469 0.368 0.290 0.229 0.182 0.145 0.116 0.093 0.075 0.061 0.050 0.040 0.033 0.027 0.013 0.758 0.577 0.442 0.340 0.263 0.205 0.160 0.125 0.099 0.078 0.062 0.049 0.039 0.032 0.025 0.021 0.009 0.743 0.555 0.417 0.315 0.239 0.183 0.140 0.108 0.084 0.065 0.051 0.040 0.031 0.025 0.020 0.016 0.728 0.534 0.394 0.292 0.218 0.163 0.123 0.093 0.071 0.054 0.042 0.032 0.025 0.019 0.015 0.012 0.714 0.513 0.371 0.270 0.198 0.146 0.108 0.080 0.060 0.045 0.034 0.026 0.020 0.015 0.012 0.009 0.350 0.250 0.180 0.130 0.095 0.069 0.051 0.038 0.028 0.021 0.016 0.012 0.009 0.007 0.331 0.232 0.164 0.116 0.083 0.060 0.043 0.031 0.023 0.017 0.012 0.009 0.007 0.005 0.312 0.215 0.149 0.104 0.073 0.051 0.037 0.026 0.019 0.014 0.010 0.007 0.005 0.004 0.294 0.199 0.135 0.093 0.064 0.044 0.031 0.022 0.015 0.011 0.008 0.006 0.004 0.003 0.278 0.184 0.123 0.083 0.056 0.038 0.026 0.018 0.013 0.009 0.006 0.004 0.003 0.002 0.262 0.170 0.112 0.074 0.049 0.033 0.022 0.015 0.010 0.007 0.005 0.003 0.002 0.002 0.102 0.066 0.043 0.028 0.019 0.013 0.008 0.006 0.004 0.003 0.002 0.001 0.059 0.038 0.024 0.016 0.010 0.007 0.005 0.003 0.002 0.001 0.001 0.598 0.361 0.220 0.135 0.084 0.053 0.033 0.021 0.014 0.009 0.006 0.004 0.002 0.002 0.001 0.001 0.586 0.347 0.207 0.125 0.076 0.047 0.029 0.018 0.011 0.007 0.005 0.003 0.002 0.001 0.001 0.001 0.574 0.333 0.196 0.116 0.069 0.042 0.026 0.016 0.010 0.006 0.004 0.002 0.002 0.001 0.001 0.000 0.563 0.321 0.185 0.107 0.063 0.037 0.022 0.014 0.008 0.005 0.003 0.002 0.001 0.001 0.000 0.000 0.552 0.308 0.174 0.099 0.057 0.033 0.020 0.012 0.007 0.004 0.003 0.002 0.001 0.001 0.000 0.000 0.005 0.003 0.700 0.002 0.494 0.475 0.686 0.002 0.673 0.456 0.001 0.660 0.439 0.647 0.422 0.634 0.406 0.622 0.390 0.247 0.158 0.001 0.001 0.000 0.000 0.000 0.610 0.375 0.233 0.146 0.092 3456789 PINETAN 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Present Value of $1* 4% 6% 8% 10% 12% 14% 16% 18% 30% 32% 40% 0.000 0.000 0.000 0.000 0.000

Question

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 - 76,628

2 162,708 76,628

The company’s cost of capital is 10 percent. The present value tables provided in Exhibit 19B.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).

System 1 System 2

NPV $ $

IRR % %

2. Why is the project with the larger NPV the correct choice for the company?

EXHIBIT 19B.2
Periods 2%
1
2
3
4
5
6
8
9
DHZBHRFN28
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
29
30
4%
*P₁ = (1/1) × [1-1/(1+0.
Present Value of an Annuity of $1 in Arrears*
6%
8%
10%
12% 14% 16% 18%
20%
22% 24%
26% 28%
30% 32%
40%
2.168
2.263
2.331
2.379
2.414
2.438
2.456
1.690
2.402
3.037
3.605
5.601 5.242 4.917
4.111
6.472 6.002 5.582 5.206 4.868 4.564
7.325 6.733 6.210 5.747 5.335 4.968
8.162 7.435 6.802 6.247 5.759 5.328
8.983 8.111 7.360 6.710 6.145 5.650
9.787 8.760 7.887 7.139 6.495 5.938
10.575 9.385 8.384 7.536 6.814 6.194
11.348 9.986 8.853 7.904 7.103 6.424
12.106 10.563 9.295 8.244 7.367 6.628
12.849 11.118 9.712 8.559 7.606 6.811
13.578 11.652 10.106 8.851 7.824 6.974
14.292 12.166 10.477 9.122 8.022 7.120
14.992 12.659 10.828 9.372 8.201 7.250
15.678 13.134 11.158 9.604 8.365 7.366
16.351 13.590 11.470 9.818 8.514 7.469
17.011 14.029 11.764 10.017 8.649 7.562
17.658 14.451 12.042 10.201 8.772 7.645
18.292 14.857 12.303 10.371
10.371 8.883 7.718
18.914 15.247 12.550 10.529 8.985 7.784
19.523 15.622 12.783 10.675 9.077 7.843
20.121 15.983 13.003 10.810 9.161 7.896
20.707 16.330 13.211 10.935 9.237 7.943
21.281 16.663 13.406 11.051
11.051 9.307 7.984
21.844 16.984 13.591 11.158 9.370 8.022
22.396 17.292 13.765 11.258 9.427 8.055
0.980 0.962 0.943 0.926 0.909 0.893 0.877 0.862 0.847 0.833 0.820 0.806 0.794 0.781 0.769 0.758
0.714
1.942 1.866 1.833 1.783
1.736
1.647 1.605 1.566 1.528 1.492 1.457 1.424 1.392 1.361 1.331 1.224
2.884 2.775 2.673 2.577 2.487
2.322 2.246 2.174 2.106 2.042 1.981 1.923 1.868 1.816 1.766
1.589
3.808 3.630 3.465 3.312 3.170
2.914 2.798 2.690 2.589 2.494 2.404 2.320 2.241 2.166 2.096 1.849
4.713 4.452 4.212 3.993 3.791
3.433 3.274 3.127 2.991 2.864 2.745 2.635 2.532 2.436 2.345 2.035
4.623 4.355
3.889 3.685 3.498 3.326 3.167 3.020 2.885
2.759 2.643 2.534
4.288 4.039 3.812 3.605 3.416 3.242 3.083 2.937 2.802 2.677
4.639 4.344 3.078 3.837
3.619 3.421 3.241 3.076 2.925 2.786
4.946 4.607 4.303 4.031 3.786 3.566 3.366 3.184 3.019 2.868
5.216 4.833 4.494 4.192 3.923 3.682 3.465 3.269 3.092 2.930
5.453 5.029 4.656 4.327 4.035 3.776 3.543 3.335 3.147 2.978
5.660 5.197 4.793 4.439 4.127 3.851 3.606 3.387 3.190 3.013
5.842 5.342 4.910 4.533 4.203 3.912 3.656 3.427 3.223 3.040
6.002 5.468 5.008 4.611 4.265 3.962 3.695 3.459 3.249 3.061
6.142 5.575 5.092 4.675 4.315 4.001 3.726 3.483 3.268 3.076
6.265 5.668 5.162 4.730 4.357 4.033 3.751 3.503 3.283 3.088
6.373 5.749 5.222 4.775 4.391 4.059 3.771 3.518 3.295 3.097
6.467 5.818 5.273 4.812 4.419 4.080 3.786 3.529 3.304 3.104 2.494
6.550 5.877 5.316 4.843 4.442 4.097 3.799 3.539 3.311 3.109 2.496
6.623 5.929 5.353 4.870 4.460 4.110 3.808 3.546 3.316 3.113
2.497
6.687 5.973 5.384 4.891 4.476 4.121 3.816 3.551 3.320 3.116
6.743 6.011 5.410 4.909 4.488 4.130 3.822 3.556 3.323 3.118
6.792 6.044 5.432 4.925 4.499 4.137 3.827 3.559 3.325 3.120
6.835 6.073 5.451 4.937 4.507 4.143 3.831 3.562 3.327 3.121
6.873 6.097 5.467 4.948 4.514 4.147 3.834 3.564 3.329 3.122
6.906 6.118 5.480 4.956 4.520 4.151 3.837 3.566 3.330 3.123
6.935 6.136 5.492 4.964 4.524 4.154 3.839 3.567 3.331 3.123
6.961 6.152 5.502 4.970 4.528 4.157 3.840 3.568 3.331 3.124 2.500
6.983 6.166
5.510
4.975 4.531 4.159 3.841 3.569 3.332 3.124 2.500
7.003 6.177 5.517 4.979 4.534 4.160 3.842 3.569 3.332 3.124 2.500
2.469
2.478
2.484
2.489
2.492
2.498
2.498
2.499
2.500
2.499
2.499
2.500

EXHIBIT 19B.1
1
2
Periods 2%
20% 22% 24% 26% 28%
0.769 0.758
0.592 0.574
0.455 0.435
0.714
0.510
0.364
0.350 0.329
0.006
0.980 0.962 0.943 0.926 0.909 0.893 0.877 0.862 0.847 0.833 0.820 0.806 0.794 0.781
0.961 0.925 0.890 0.857 0.826 0.797 0.769 0.743 0.718 0.694 0.672 0.650 0.630 0.610
0.942 0.889 0.840 0.794 0.751 0.712 0.675 0.641 0.609 0.579 0.551 0.524 0.500 0.477
0.924 0.855 0.792 0.735 0.683 0.636 0.592 0.552 0.516 0.482 0.451 0.423 0.397 0.373
0.260
0.906 0.822 0.747 0.681 0.621 0.567 0.519 0.476 0.437 0.402 0.370 0.341 0.315 0.291 0.269 0.250 0.186
0.888 0.790 0.705
0.636 0.564 0.507 0.456 0.410 0.370 0.335 0.303 0.275 0.250 0.227 0.207 0.189 0.133
0.871 0.760 0.665 0.583 0.513 0.452
0.400 0.354 0.314 0.279 0.249 0.222 0.198 0.178 0.159 0.143 0.095
0.853 0.731 0.627 0.540 0.467 0.404 0.351 0.305 0.266 0.233 0.204 0.179 0.157 0.139 0.123 0.108 0.068
0.837 0.703 0.592 0.500 0.424 0.361 0.308 0.263 0.225 0.194 0.167 0.144 0.125 0.108 0.094 0.082
0.048
0.820 0.676 0.558 0.463 0.386 0.322 0.270 0.227 0.191 0.162 0.137 0.116 0.099 0.085 0.073 0.062 0.035
0.804 0.650 0.527 0.429 0.350 0.287 0.237 0.195 0.162 0.135 0.112 0.094 0.079 0.066 0.056 0.046 0.025
0.788 0.625 0.497 0.397 0.319 0.257 0.208 0.168 0.137 0.112 0.092 0.076 0.062 0.052 0.043 0.036 0.018
0.773 0.601 0.469 0.368 0.290 0.229 0.182 0.145 0.116 0.093 0.075 0.061 0.050 0.040 0.033 0.027 0.013
0.758 0.577 0.442 0.340 0.263 0.205 0.160 0.125 0.099 0.078 0.062 0.049 0.039 0.032 0.025 0.021 0.009
0.743 0.555 0.417 0.315 0.239 0.183 0.140 0.108 0.084 0.065 0.051 0.040 0.031 0.025 0.020 0.016
0.728 0.534 0.394 0.292 0.218 0.163 0.123 0.093 0.071 0.054 0.042 0.032 0.025 0.019 0.015 0.012
0.714 0.513 0.371 0.270 0.198 0.146 0.108 0.080 0.060 0.045 0.034 0.026 0.020 0.015 0.012 0.009
0.350 0.250 0.180 0.130 0.095 0.069 0.051 0.038 0.028 0.021 0.016 0.012 0.009 0.007
0.331 0.232 0.164 0.116 0.083 0.060 0.043 0.031 0.023 0.017 0.012 0.009 0.007 0.005
0.312 0.215 0.149 0.104 0.073 0.051 0.037 0.026 0.019 0.014 0.010 0.007 0.005 0.004
0.294 0.199 0.135 0.093 0.064 0.044 0.031 0.022 0.015 0.011 0.008 0.006 0.004 0.003
0.278 0.184 0.123 0.083 0.056 0.038 0.026 0.018 0.013 0.009 0.006 0.004 0.003 0.002
0.262 0.170 0.112 0.074 0.049 0.033 0.022 0.015 0.010 0.007 0.005 0.003 0.002 0.002
0.102 0.066 0.043 0.028 0.019 0.013 0.008 0.006 0.004 0.003 0.002 0.001
0.059 0.038 0.024 0.016 0.010 0.007 0.005 0.003 0.002 0.001 0.001
0.598 0.361 0.220 0.135 0.084 0.053 0.033 0.021 0.014 0.009 0.006 0.004 0.002 0.002 0.001 0.001
0.586 0.347 0.207 0.125 0.076 0.047 0.029 0.018 0.011 0.007 0.005 0.003 0.002 0.001 0.001 0.001
0.574 0.333 0.196 0.116 0.069 0.042 0.026
0.016 0.010 0.006 0.004 0.002 0.002 0.001 0.001 0.000
0.563 0.321 0.185 0.107 0.063 0.037 0.022 0.014 0.008 0.005 0.003 0.002 0.001 0.001 0.000 0.000
0.552 0.308 0.174 0.099 0.057 0.033 0.020 0.012 0.007
0.004 0.003 0.002 0.001 0.001 0.000 0.000
0.005
0.003
0.700
0.002
0.494
0.475
0.686
0.002
0.673
0.456
0.001
0.660
0.439
0.647
0.422
0.634 0.406
0.622 0.390 0.247 0.158
0.001
0.001
0.000
0.000
0.000
0.610 0.375 0.233
0.146
0.092
3456789 PINETAN
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
Present Value of $1*
4%
6%
8%
10%
12%
14% 16% 18%
30%
32%
40%
0.000
0.000
0.000
0.000
0.000

Accepted Answer

The Net present value is calculation that is involved in the decision making of project with…