Diana Dennison is a financial analyst working for a large chain of discount retail stores. Her company is looking at the

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Diana Dennison is a financial analyst working for a large chain
of discount retail stores. Her company is looking at the
possibility of replacing the existing fluorescent lights in all of
its stores with LED lights. The main advantage of making this
switch is that the LED lights are much more efficient and will cost
less to operate. In addition, the LED lights last much longer and
will have to be replaced after ten years, whereas the existing
lights have to be replaced after five years. Of course,
making this change will require a large investment to purchase new
LED lights and to pay for the labor of switching out tens of
thousands of bulbs. Diana plans to use a 10-year horizon to analyze
this proposal, figuring that changes to lighting technology will
eventually make this investment obsolete.
Diana’s friend and coworker, David, has analyzed another
energy-saving investment opportunity that involves replacing
outdoor lighting with solar-powered fixtures in a few of company’s
stores. David also used a 10-year horizon to conduct his analysis
cash flow forecasts for each project appear below. The company uses
a 10% discount rate to analyze capital budgeting proposals.
Year
LED project
Solar project
0
-RM4200000
-RM500000
1
700000
60000
2
700000
60000
3
700000
60000
4
700000
60000
5
1000000
60000
6
700000
60000
7
700000
60000
8
700000
60000
9
700000
60000
10
700000
60000
The Net Present Value of Solar Project is negative and
that means the NPV of the costs exceeds the present value of the
revenues at the assumed discount rate.it will be a bad investment
if we choose this project.
Do the net present value (NPV) and internal rate of return (IRR)
always agree with respect to accept-reject decisions; with respect
to ranking decision? Explain