A company (Nugget) has to choose between mutally exclusive innovations for improving its computer system one is offered by AMD and the other by NRC. The after tax cost of capital is 12 percent. AMD's system costs $1 million and promises after-tax cash flows in personnel cost saving 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 systems 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.
Compute the net present values of each of the alternatives
Compute the internal rate of return for each of the alternatives
Which alternative, if either, should they use
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