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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

Likewise

Machine B is preferable

because

It have higher NPV, low IRR and low investment size (2 positive factors)

rather machine A

which have low NPV, higher IRR and high investment size (two negative factors)

S I M P L E    I S   T H A T    Shayd

If any one found my calculations wrong, plz let me inform to correct it. :) 

which one is the correct formula for calcuting NPV,As i read different formulas for NPV in different books. first: NPV=-IO+ΣCFt/ (1+i) t Second: NPV = Co + C1 / 1 + r Third: NPV = PV - cash out flows

and why these are different.is there any logic or some specific criteria for them to use differently

 Awais Shamim 

Your calculations are right. my calculation was wrong due to put wrong sign in formula 1-r, instead of 1+r. I also checked in excel by applying financial function of NPV and IRR. 

discount 10% cash flow kaise nikalte hai plz bata dey

for example

28700/1+.1

10%=.1

sana 

ye assumed hota hai

IRR ke liye hum 2 interest rate assume krtay hen

aik wo jis say NPV +ve nilay or aik wo jis say NPV -ve niklay

9,090.90 yh kaise aa raha hai just ek step kar k bata dey koi,kon sa formula lagy ga tu yh amount aye gee

10000/(1+.1)

11000/(1.1)

9090.90

asy karoo

Thanks. So Hope Your Assignment Is Done And Submitted :) hmmm ?

thanx azmay jub main ne 11ooo (1.1) calculated kia hai tub amount 1000 aa rahy hai jub k solution main 8,264.46 yh amount hai.

yha is kao asy kana ha

2nd years ko 1000/(1.1)^2

or as it is krna ha

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