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FIN622 - Corporate Finance

PROBLEM:
ABC Company is considering the acquisition of a machine to improve its production. The company has to make a choice between two types of machine A and B. Each machine will have a 4-year life with no salvage value.
Cost of capital of the firm is 14%. Initial investments required to purchase and install the machines A and B, are PKR 28,700 and PKR 27,050 respectively. Machine A will generate an inflow of PKR 10,000 each year while Machine B is expected to generate cash inflows in the following manner.


Year          Cash Inflows (PKR)
1               11,000
2               10,000
3               9,000
4                8,000


Required:


Calculate NPV and IRR for both options. Which machine should be preferred and why?

Note:
For calculating IRR you are required to use “Trial and Error Method” along with “Interpolation Technique/Formula”. In this particular regard, you are advised to consult PPT slideshow “Finding IRR is no more difficult” uploaded in the lesson contents of Lesson # 10.

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Replies to This Discussion

Thank u so much its very help ful

By Usind Interpolation Technique Formula

I Used 10% Discounted Cash Flow And 20% Discounted Cash Flow

IRR = a + {[A/(A-B)] * (b-a)}

formula use hoe ga

where

a = lower discount rate

b = higher discount rate

A = NPV obtained with discount rate a

B = NPV obtained with discount rate b....

LECTURE # 10

Awais Shamim how did you calculate

should I share my calculation?

amir awais's answrs are totly differ he have bhot machine npv is positive while my npv are negtive. how he do?

did u know that any idea?????

hv u taken ur initail investment -ve ?

I Have Shown The Formulas Which I Used. Ayesha Go Again With That Formula.

And Ofcourse Amir You Should :)

awais

IRR = a + {[A/(A-B)] * (b-a)}
     = 10+{[438/(438-1106)]*(20-10)}
       =    16.5%   

IRR MACHINE B = 16.5%

THAN how to calculate IRR= Machine A = 16.5% and which discount rate use in this calculation.?

  m totally confious to your answer. 


TIME

CASH FLOW

DISCOUNTED CASH FLOW (10%)

DISCOUNTED CASH FLOW (20%)

00

-28,700

-28,700

-28,700

01

10,000

9,090.90

8,333.33

02

10,000

8,264.46

6,944.44

03

10,000

7,513.14

5,787.03

04

10,000

6,830.13

4,822.53

NPV

11,300

2,998.53

-2,812.67

IRR = a+ [{A/ (A-B)} * (b-a)] %

IRR = 10 + [{2,998.53 / (2,998.53 + 2,812.67)} * (20-10) %

IRR = 10 + {(2,998.53 / 5,811.2) * 10} %

IRR = 10 + (0.51 * 10)

IRR = 15.1 %

same as Machine B Ka B Nikal Ae Ga

v  NPV prefers “Machine B” to “Machine A

v  IRR prefers “Machine A” to “Machine B

According to my calculations machine B should be preferred 

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