Assume Nugget Co. must choose between two mutually exclusive innovations for improving its computer systemone offered by

Question:

Assume Nugget Co. must choose between two mutually exclusive innovations for improving its computer system—one offered by AMD and the other by NEC. Nugget’s after-tax cost of capital is 12 percent.

AMD’s system costs $1 million and promises after-tax cash flows in personnel cost savings for four years: $400,000 at the end of Year 1 and Year 2, $300,000 at the end of Year 3, and $200,000 at the end of Year 4. NEC’s system costs $1.5 million and promises after-tax cash flows for three years:

$800,000 at the end of Year 1, $600,000 at the end of Year 2, and $500,000 at the end of Year 3.

a. Compute the net present values of each of the alternatives.

b. Compute the internal rate of return for each of the alternatives.

c. Which alternative, if either, should Nugget choose, and why?

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