www.vustudents.ning.com

We non-commercial site working hard since 2009 to facilitate learning Read More. We can't keep up without your support. Donate.

# 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.

Views: 5424

Attachments:

### 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

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

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

1

2

3

4

5

## Latest Activity

3 hours ago
3 hours ago

### Rahbari Ka Sawal Hai

11 hours ago
11 hours ago
ASIM!! posted a photo

### Rahbari Ka Sawal Hai

12 hours ago
ASIM!! liked Zohaib Hassan's discussion ***ترا اعتبار کرتے رہے***
14 hours ago
ASIM!! liked Mi@'s photo

14 hours ago

14 hours ago