Ct2 IAI May 2011

Ques no. 17:

Why havn't they considered salvage value of 10000 of old system under alternative 2?
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What rate of discount they hav used for NPV purposes?
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How can we comment on IRR (without calculating it) on basis of NPV?
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Please reply as soon as possible.
Thanks
Shikha

 

The rate of discount used is 10% as given in the question.

Now since we know that as the discount rate increases, the present value decreases. And the npv of option 1 is more, that means to make it's Pv equal to 0, rate should be increased more than the 2nd option. That's why the irr will be higher for option 2.