Scenario 1 Foster Airlines is considering two different computer systems: the Standard System and the Custom Travel System. The projected annual revenues, annual costs, capital outlays, and project life for each system (in after-tax cash flows) are as follows: Standard System Custom Travel Annual revenues $540,000 $675,000 Annual operating costs 270,000 360,000 System investment 810,000 945,000 Project life 5 years 5 years Assume that the required rate of retum for the company is 12 percent Required 1. Calculate the NPV for each of the two systems (round discount factor to five decimal places and present values to the nearest dollar): Please review the tab "PV Table" for the present values NPV (Standard System)-5 163.290 X NPV (Custom Travel)-5 190,505 X Points 10/1 Points 10/1 The NPV calculations imply that the Custom Travel system would be chosen because it has the larger NPV Points 212 The NPV calculations imply that the Custom Travel system would be chosen because it has the larger NPV 2. Calculate the discount factor associated with the IRR for each project (round calculated discount factor to five decimal places): Discount factor for Standard System 3,00000 Discount factor for Custom Travel System 3.00000 PONIST 07 Points: 2/2 Points: 1/1 Points: 11/1 Thus, given the discount factors and using the table for the present value of an annuity, we can say that the IRR for each project is between 20% (round to nearest percent). 10 X% and Points: 1/2 firm value more.. Furthermore, the discount factors imply that the IRA for the Custom Travel System is equal to the IRR for the Standard System. Thus, the IRR signals that the economic benefit of the Custom Travel System is equal to the Standard System. Yet, the economic benefit of the Custom Travel System is greater than the Standard System because it has the larger NPV and thus, Increases Points: 15/5