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.
Required:
1. Compute the NPV and the IRR for each investment.
2. Show that the project with the larger NPV is the correct choice for the company.