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.
Tags:
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”
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