https://file.aiquickdraw.com/mathbot/file/1726069981913dedhuptq.jpg

Q. PQR Ltd. is considering the purchase of new machine. Two alternative machines have been suggested, cash costing 4,00,000 and requiring 30,000 as additional working capital at the end of the 1st year. EAT are expected to be as follows:

To solve this problem using the Net Present Value (NPV) method, we need to calculate the NPV of both Machine A and Machine B, given a target return on capital of 10%.

### Step-by-Step Approach:

1. **Initial Investment**:
   - Both machines have an initial cost of Rs. 4,00,000.
   - Additional working capital of Rs. 30,000 is required at the end of the first year.

2. **Expected Cash Flows (EAT)**:
   - The cash flows for Machine A and Machine B over the 5 years are provided in the table.

3. **Discount Rate**:
   - The company's target return on capital is 10%, which will be used as the discount rate to calculate the NPV.

### NPV Calculation:

The formula for NPV is:

\[
\text{NPV} = \sum \left( \frac{\text{Cash Flow at Year } n}{(1 + r)^n} \right) - \text{Initial Investment}
\]

Where:
- \( r \) is the discount rate (10% in this case).
- \( n \) is the year (from 1 to 5).

### Calculating the NPV for both machines:

Let me calculate the NPV for Machine A and Machine B based on the provided cash flows.The Net Present Values (NPV) for both machines are:

- **Machine A:** Rs. 91,745.47
- **Machine B:** Rs. 95,947.87

### Conclusion:
Since the NPV for **Machine B** is higher than that of **Machine A**, **Machine B** is the more profitable choice based on the NPV method.

Would you like a detailed breakdown of the calculations or have any questions?

### Additional Questions:
1. What is the significance of the NPV method in capital budgeting decisions?
2. How does the discount rate affect the NPV calculation?
3. Can you explain how sensitivity analysis might help in this decision?
4. What other factors might the company consider beyond NPV when choosing between these machines?
5. How would changes in the cost of capital affect the decision?

### Tip:
Always compare the NPVs of different options when choosing between investments, as a higher NPV generally indicates a more profitable project.

PQR Ltd. is considering the purchase of a new machine. Two alternative machines have been suggested, costing Rs. 4,00,000 each and requiring Rs. 30,000 as additional working capital at the end of the 1st year. EAT are expected to be as follows: [Table Provided]. The company has a target return on capital of 10%, and you are required to select the most profitable machine on the NPV method.

Evaluate the purchase of new machinery using the Net Present Value (NPV) method. This problem involves calculating the NPV for two machines with initial costs of Rs. 4,00,000, considering a 10% return on capital. Compare the profitability of Machine A and Machine B based on projected cash flows and make an informed decision.

Math Problem Statement

Solution

Ask a new question for Free

By Image

Math Problem Analysis

Mathematical Concepts

Formulas

Theorems

Suitable Grade Level

Related Recommendation