1. The sum of cash-inflows of l Hitherto machines is Rs 93,000 which when divided by the economic life of the machine (5 rears). results in a ‘fake annuity’ of Rs 18.600.
2. Dividing the blini outlay of Rs by R, 18.600, we have ‘fake average pay hack period’ of 3.017 years.
3. In Table A-4. the factor closest 10 3.017 for ~ rears is 2.991 for a Me of 20 per cent.
4, Since Ihe actual cash flows in the earlier years arc greater than the average cash flows of R<‘18,600 in machine B. a subjective increase of. say, 1 per cent is made. This makes an estimated rate of IRR 21 per cent for machine II. In the case of machine A. since cash inflows in the initial rears arc smaller than the average cash flows, a subjective decrease of, say, 2 pcr cent is ‘made. This makes the estimated IRR rare 18 per cent for Michelin A. . S. Using the PV factors for 21 per cent (Mainline and II! per cent (Machine AI from Table A-3 for years 1-5, the PVs are calculated In Tank 10.1
6. Since the NPV” negative for hath the machine’. the demount rate should he subsequently lowered. In the G””- of machine A the is of Rs 572 whereas in machine B the difference is Rs 107. Therefore, in the fonder case the discount rate is lowered y 1 per cent in both the Case S. As a result, the new discount rate would be 17 per cent for A and 20 per cent for B.The calculations’given in Table 10.14 shows that the NPV at discount rate of 17 per cent is Rs 853 (machine A) and .Rs 1.049 for machine B at 20 per cent discount.
(a) For machine A: Since 17 per cent and 18 per cent arc consecutive discount rates then give positive and negative net present values, interpolation method can be applied to find the actual IRR which will be between 17 and 18 per cent