NPV Versus IRRCovington Pharmacies has decided to automate its insurance claims process. Twonetworked computer systems are being considered. The systems have an expected lifeof two years. The net cash flows associated with the systems are as follows. The cashbenefits represent the savings created by switching from a manual to an automatedsystem.YearSystem ISystem II0$(120,000)$(120,000)12162,70876,62876,628The company's cost of capital is 10 percent.The present value tables provided in Exhibit 198.1 and Exhibit 19B.2 must be used tosolve the following problems.Required:1. Compute the NPV and the IRR for each investment. If required, round intermediatecalculations and NPV to the nearest dollar and round IRR percentages to one decimalplace (for example, 15.68% rounds to 15.7% and should be entered as "15.7" in theanswer box).NPVIRRSystem ISystem II2. 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 firmIts IRR is higher, so its selection maximizes the value of the firmIn this case, the project with the higher NPV is not the correct choice

Conclusion:Covington Pharmacies should choose System I based on a higher NPV, even though System II…

Answered: NPV Versus IRR Covington Pharmacies has…

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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