Page 437 - Corporate Finance PDF Final new link

NPP

BRILLIANT’S Capital Budgeting 437

NPV of Lower Rate
Lower Rate +  DifferenceinRate
Difference in Cash Inflows
2, 910  3 , 3 830
= 15% = 15% – 1.29% = 13.705%. or 12% +  3 = 12 + 1.704 = 13.705%
6, 740 , 6 740
Note: Sales increase by 2,00,000, operating expenses 1,60,000. Hence, net revenue will be-
= 2,00,000 – 1,60,000 = ` 40,000

Illustration 5.1.12
Calculate IRR for the two machines: / Xmo ‘erZ Ho$ {bE IRR H$s JUZm H$s{OE…
Particulars Machine M Machine N
({ddaU) (‘erZ M) (‘erZ N)
(`) (`)
1. Purchase Price (Cash Outflow) / nMo©g àmBg (H¡$e AmCQ>âbmo) 60,000 60,000

2. Cash Inflows / H¡$e BZâbmo
First Year / nhbm df© 16,000 24,000
Second Year / Xÿgam df© 17,000 21,000
Third Year / Vrgam df© 19,000 19,000
Fourth Year / Mm¡Wm df© 21,000 17,000
Fifth Year / nm§Mdm df© 24,000 16,000
3. Estimated Life / AZw‘m{ZV OrdZ 5 years 5 years

Note: For calculating IRR, the rates for PV factor are taken on trial and error basis. Here
the rates are selected such that they are close to the actual IRR. Students may select some other
rates as per their perception.
ZmoQ>… IRR H$s JUZm Ho$ {bE PV ’¡$³Q>a Ho$ {bE aoQ²>g H$mo Q´>m¶b VWm Eaa AmYma na {b¶m J¶m h¡& ¶hm§
aoQ²>g H$mo Bg àH$ma MwZm J¶m h¡ {H$ do dmñV{dH$ IRR Ho$ {ZH$Q> h¢& N>mÌ CZH$s YmaUm Ho$ AZwgma {H$gr Aݶ
aoQ> H$m MwZmd H$a gH$Vo h¢&
Solution:
Statement Showing Computation of IRR (Machine M)

Year Cash Flows PV Factors PV PV Factors PV
(`) @ 17% (`) @ 18% (`)

0 (60,000) 1.000 (60,000) 1.000 (60,000)
1 16,000 0.855 13,680 0.847 13,552
2 17,000 0.731 12,427 0.718 12,206
3 19,000 0.624 11,856 0.609 11,571