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# FIN622 - Corporate Finance Assignment no 1 closing date May 21, 2014.

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

Great Work All

Machine B is preferred:

1. NPV of B= 1105 > NPV of A=437
2. IRR of B= 16.5% > IRR of A=14.74%
3. Initial Investment of B = Rs.27050 < Initial Investment of A= Rs.28700

B ny A ko Bingo kerdia . . am I good?

kya npv ka leya 10% or 20% hi examin kar sakty hy ka hum 12% or 16% b kar sakty hy

FOR MACHINE (A):

 TIME CASH FLOW DISCOUNT FACTOR (10%) PV OF CASH FLOW AT (10%) DISCOUNT FACTOR (19%) CASH FLOW (19%) 0 -28,700 1.00 -28,700 1.00 -28,700 01 10,000 .9091 9,091 .8403 8,403 02 10,000 .8264 8,264 .7062 7,062 03 10,000 .7513 7,513 .5934 5,934 04 10,000 .6830 6,830 .4987 4,987 NPV 11,300 2,998 -2,314

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

IRR = 10 + [{2,998 / (2,998 + 2,314)} * (19-10) %

IRR = 10 + {(2,998 / 5312) * 9} %

IRR = 10 + (0.56 * 9)

IRR = 15 %

IRR of Machine (B):

 TIME CASH FLOW DISCOUNT FACTOR (10%) PV OF CASH FLOW AT (10%) DISCOUNT FACTOR (19%) CASH FLOW (19%) 0 -27050 1.00 -27050 1.00 -27050 01 11,000 .9091 10000 .8403 9243.3 02 10,000 .8264 8264 .7062 7062 03 9,000 .7513 6761.7 .5934 5340.6 04 8,000 .6830 5464 .4987 3989.6 NPV 3439.7 -1414.5

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

IRR = 10 + [{3439.7 / (3439.7 + 1414.5)} * (19-10) %

IRR = 10 + {(3439.7 / 4854.2) * 9} %

IRR = 10 + (0.70* 9)

IRR = 16.37 %

NPV prefers “Machine B” to “Machine A

IRR prefers “Machine A” to “Machine B

Note:
If the IRR of a project is lower then the target return , the project is deemed unfeasible.
AND
If the IRR of a project is greater then the target return , the project is deemed feasible.

Good Job All (y)

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