PART II : FINANCIAL MANAGEMENT 1. Answer the following ...

= Rs. 100,000 ÷ Rs. 20,000
= 5 years.
(b) Calculation of Net Present Value (NPV) and Internal Rate of Return (IRR) for
Equipment A and Equipment B
Equipment A:
NPV = 20,000 � PVAF6,0.11 – 75,000
= 20,000 � 4.231 – 75,000
= 84,620 – 75,000 = Rs. 9,620
IRR = 20,000 � PVAF6,r = 75,000
PVAF6,r = 75,000 / 20,000 = 3.75
From the present value of an annuity table, we find:
PVAF6,0.15 = 3.784
PVAF6,0.16 = 3.685
� 3.784 �3.75
�
Therefore, IRR �r
�0.15
�0.01
�
�
�3.784
�3.685�
Equipment B:
= 0.15 + 0.0034
= 0.1534 or 15.34%.
NPV = 14,000 � PVAF6,0.11 – 50,000
= 14,000 � 4.231 – 50,000
= 59,234 – 50,000 = Rs. 9,234
IRR = 14,000 � PVAF6,r = 50,000
PVAF6,r = 50,000/14,000 = 3.571
From the present value of an annuity table, we find:
PVAF6,0.17 = 3.589
PVAF6,0.18 = 3.498
�3.589
�3.571�
Therefore, IRR �r
�0.17
�0.01
� �
�3.589
�3.498�
= 0.17 + 0.002 = 0.172 or 17.20%.
Recommendation: Equipment A has a higher NPV but lower IRR as compared to
Equipment B. Therefore, Equipment A should be preferred since the wealth of the
shareholders will be maximized.
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