Explain which plan should have higher NPV value

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Reference no: EM132961317

Question - Group Genesis is considering upgrading its computer servers. Two mutually exclusive plans are proposed by the IT consulting firm and their respective estimated net cash flows are listed below. Assume that the relevant discount rate is 8% per annum.

Year

Plan I

Plan II

0

-$150,000

-$150,000

1

$50,000

$64,000

2

$50,000

$56,000

3

$50,000

$40,000

4

$50,000

$40,000

Required -

(a) Compute the payback period for Plan I and Plan II.

(b) If Group Genesis uses a payback criterion of 2.8 years or less, which plan would it choose based on the results in part (a)?

(c) Just by studying the cash flows pattern of Plans I and II (i.e., WITHOUT calculation), explain which plan should have higher NPV value.

(d) Compute the NPV of Plan I and Plan II. Which plan should the company accept (if any)?

(e) Based on the results in parts (a) and (d), which plan should Group Genesis choose? Explain.

Reference no: EM132961317

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