Question 1) Part A
Prestige Perfect Cooker Company is a manufacturer of aluminum utensils. Two new automated process machines used in the production of aluminum utensils have been introduced to the market, the MLH and the NSA. Both will give cost savings over existing processes:
MLH NSA
Rs.000’s Rs.000’s
Initial Cost
(Machine purchase and Installation, etc.) 240 254
Cash flow savings:
At Time 1 (one year after the initial cash outflow) 96 100
At Time 2 96 100
At Time 3 96 100
At Time 4 96 100
All other factors remain constant and the firm has access to large amounts of capital. The required return on projects is 4%.
Required:
a) Compute IRR for MLH using trial rate of 21% and 22%.
b) Compute IRR for NSA using trial rates of 18% and 25%.
c) Based on IRR which machine would you purchase?
d) Compute NPV for each machine.
e) Based on NPV which machine would you buy?
f) In assessing capital investments, finance managers generally use three techniques – payback period or discounted payback period, IRR and NPV. Of the three, which one is most appropriate for evaluation of capital investments? What type of problems would you predict in other techniques and under what conditions would you use them?