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:
kindly help me
me also use this formula for npv, formula right ho yeh matter krta h, u got right ans vu waily
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/ (AB)} * (ba)] %
IRR = 10 + [{2,998.53 / (2,998.53 + 2,812.67)} * (2010) %
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/ (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 %
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
IRR = a+ [{A/ (AB)} * (ba)] %
IRR = 10 + [{2,998.53 / (2,998.53 + 2,812.67)} * (2010) %
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
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
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