1. Briefly describe how to calculate net present value (NPV) and incremental rate of return (IRR). What is the formula used for each?

2. Describe how NPV is used in investment decisions (what it means when NPV is positive, zero, negative). Describe how IRR is used in investment decisions. Compare the pros and cons of using NPV versus IRR.

3. From looking at the tables below, What are the NPVs and IRRs of the two alternative technologies Based on the information in the case, what factor drives the financial superiority of the more profitable technology?

New System Using Water Perfusion Technology: Year 1 Year 2 Year 3 Year 4 Year 5 Computer workstation Catheters Net revenue Variable costs Year o ($25,000) ($4,500) $50,000 35,000 $51,500 36,050 $53,045 37,132 $54,636 38.245 $56,275 39,393 Net cash flow ($29,500) $15,000 $15,450 $15,914 $16,391 $16,883 Net present value (NPV) Internal rate of return (IRR) $30,539 44.5% New System Using Solid State Technology: Without Backfill Effects: Year 1 Year 2 Year 3 Year 4 Year 5 Computer workstation Catheters Net revenue Variable costs Year o ($25,000) ($54,000) $75,000 58,500 $77,250 60,255 $79,568 62,063 $81,955 63,925 $84,413 65,842 Net cash flow ($79,000) $16,500 $16,995 $17,505 $18,030 $18,571 Net present value (NPV) Internal rate of return (IRR) ($12,957) 3.5% New System Using Water Perfusion Technology: Year 1 Year 2 Year 3 Year 4 Year 5 Computer workstation Catheters Net revenue Variable costs Year o ($25,000) ($4,500) $50,000 35,000 $51,500 36,050 $53,045 37,132 $54,636 38.245 $56,275 39,393 Net cash flow ($29,500) $15,000 $15,450 $15,914 $16,391 $16,883 Net present value (NPV) Internal rate of return (IRR) $30,539 44.5% New System Using Solid State Technology: Without Backfill Effects: Year 1 Year 2 Year 3 Year 4 Year 5 Computer workstation Catheters Net revenue Variable costs Year o ($25,000) ($54,000) $75,000 58,500 $77,250 60,255 $79,568 62,063 $81,955 63,925 $84,413 65,842 Net cash flow ($79,000) $16,500 $16,995 $17,505 $18,030 $18,571 Net present value (NPV) Internal rate of return (IRR) ($12,957) 3.5%