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 4year 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.
Tags:
Yea check kar guyz...values is formule mein dalna.. then A machine ka IRR 14.74% aae ga or B machine ka 16.13%...SO hum machine B ko prefer karen ge kiu k us ka NPV b ziada hai means 1105.18 and IRR be reqired rate se zaida hai which is 16.13%...Hope you got the answer
Gd Job Motay :P
i used this method to calculate NPV can anyone guide me either it is correct .
NPV Calculation
For Machine A :

00 
Year 1 
Year 2 
Year 3 
Year 4 
Total 
Cash Inflow 
28,700 
10,000 
10,000 
10,000 
10,000 
11,300

Discount Cash Flow (14%) 

10,000/1+0.14 =8,771.90 
10,000/(1+0.14)^2 =7,694.67 
10,000/(1+0.14)^3 =6,749.71 
10,000/(1+0.14)^4 =5,920.80 
29,137.1

NPV = 28,700+8,771.9+7,694.64+6,749.71+5,920.8
= 437.05
Nothing wrong with the calculations, but if you use annuity method it will have some positive impact on the instructor.
Great Work
IRR of Machine B
Time 
Cash Flow 
Discount 10% 
Discount 20% 
00 
27050 
27050 
27050 
01 
11,000 
10000 
9166.67 
02 
10,000 
8264.46 
6944.44 
03 
9,000 
6761.83 
5208.33 
04 
8,000 
5464.10 
3858.02 
NPV 

3440.39 
1872.54 
IRR = a+ [{A/ (AB)} * (ba)] %
IRR = 10 + [{3440.39 / (3440.39 + 1872.54)} * (2010) %
IRR = 10 + {(3440.39 / 5,312.93) * 10} %
IRR = 10 + (0.65* 10)
IRR = 16.5 %
i hope me done right calculation, Awais Shamim
Yes ! It Is . Great Job Khiradiqbal
Dear Awais
i calculate NPV & IRR for MAchine A and B using 10 and 20 % disc.
Is there any more calculation after this procedure ?? i am little bit confuse because in PPT Slides they again calculate NPV after this procedure.
mujhy kuch b smjh nhe a rahi k kya krna h
koe btaye dy plssssssss
nothing You Have To After This. Dats it
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