Question

Machine will cost Rs. 100,000 and the machine will generate annual cash flow Rs. 30,000 each for next 6 years . If cost of capital is 15% calculate NPV & IRR. Should machine be purchased

Answer 1

Computation of NPV

Where,

PV Factor$=\frac{1}{(1+rate)^{n}}$

Formula for NPV :

NPV=∑PV of cash flows−Initial investment

Where,

PV of Cash Flows=Rs.113,534.48

Initial investment=Rs.100,000

$=Rs.113,534.48−Rs.100,000 =Rs.13,534.48$

The net present value of the project will be Rs.13,534.48 and the project should be selected based on the NPV calculation as it yields a positive outcome.

Computation of IRR :

We can determine the internal rate of return by using the formula "IRR" in excel as follows :

The internal rate of return of the project will be 19.91% and the project should be selected based on the IRR calculation as it yields a positive outcome because the WACC is lower than the IRR.