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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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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

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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/ (A-B)} * (b-a)] %

IRR = 10 + [{3440.39 / (3440.39 + 1872.54)} * (20-10) %

IRR = 10 + {(3440.39 / 5,312.93) * 10} %

IRR = 10 + (0.65* 10)

IRR = 16.5 %

i hope me done right calculation, Awais Shamim

maree bhi same aye ha

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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