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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

kindly help me

me also use this formula for npv, formula right ho yeh matter krta h, u got right ans vu waily

yaar compleet calcution bataou b ki bhi

FOR MACHINE A

 

 

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 %

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 %


 v  NPV prefers “Machine B” to “Machine A

v  IRR prefers “Machine A” to “Machine B

 

Chalo Gal Hi Muka Di Mano Ny.. Good Job Mano

thanx mano itni si baat thi

prefers ka koi reason tu btou

 egoistic mano 

IRR = a+ [{A/ (A-B)} * (b-a)] %

IRR = 10 + [{2,998.53 / (2,998.53 + 2,812.67)} * (20-10) %

formula ma ap na MINUS  ka sign use kya or solution krta time uha PLUS kr dya ha 

B ki value -2812.67 hai... n formula me b - hai... so (- & - = + ).

i hope ab samjh agaya hoga? #angel

egoistic mano 

machine B ki IRR zyada hai as compared to A. so y did u ryt IRR prefers “Machine A” to “Machine B” :/

cost of capital to 14% dya gya hai na to fir ao  10% or 20% kiun liya hai hum ek hi imagine kare ge na... lz tell me 

because we need to calculate IRR 

one for +ve NPV and second for -ve NPV

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