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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

thanx azmay

sana

jis year ka df nikaalna hota hai us ki power b utni hi leni parti hai :)

now mara B

ka

IRR=19.945

KAYA APP KA BHI YHE AYA HA

Ho Gai Sb Ki Assignment ? Any Confussion ?

listen azmay in machine a there is equal payments are being made in each an every year so this is the case of an annuity so why do we need to discount them back by each and every year rather we can use the direct formula of pv of annuity like PV= c x {(1-1/(1+r)^r}/r

although we will have exactly the same answer as sum of all npv that you calculated for each and every year. ok

awaiz bhai koi step kr k bata dey mujy aise samje ni aa rahy hai

machine b ka

IRR = 17.99

KOI BATA DEY YH THEK HA ANSWER

sub log irr k lyi formula use kar rhay han it should be done by hit or trial method

babur in question we have to calculate IRR with error and trial along with interpolation

sana me ny machine A ka hr step show kr dia hai us se dekh k nikal lo

machine b ka

IRR = 17.99

awais bhai yh bata dey yh ans thek hai machine b ka

First we calculate NPV at 14 % both on Machine A and B. Both are showing positive NPV ( A=29137.12 which means positive 437.12) (B=25155.18 WHICH MEANS positive 1105.18)..Then Calculate IRR ...On A machine at 15% it become negative NPV and on B machine at 17% it become negative ) then putting values in the formula Off IRR 

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