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Additional NPV Irr Questions Suggested Solution To q1

Hook Industries is considering three drill presses, A, B, and C, to replace an old drill press. Press A has a negative NPV of -R4,228, an IRR between 13-14% which is less than the required rate of return of 15%, and a payback period of 4.72 years. Press A is not acceptable based on the NPV and IRR analyses but has an acceptable payback period. Press B has a negative NPV of -R1,501, an IRR between 13-14% which is less than the required rate of return of 15%, and a payback period of 4.72 years. Press B is not acceptable based on the

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Additional NPV Irr Questions Suggested Solution To q1

Hook Industries is considering three drill presses, A, B, and C, to replace an old drill press. Press A has a negative NPV of -R4,228, an IRR between 13-14% which is less than the required rate of return of 15%, and a payback period of 4.72 years. Press A is not acceptable based on the NPV and IRR analyses but has an acceptable payback period. Press B has a negative NPV of -R1,501, an IRR between 13-14% which is less than the required rate of return of 15%, and a payback period of 4.72 years. Press B is not acceptable based on the

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egyptian18
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Question 1 NPV Mutually exclusive projects. Hook Industries is considering the replacement of one of its old drill presses.

. Three alternative replacement presses are under consideration. The firm's cost of capital is 15 percent. Press A Press B R85 000 R60 000 Cash inflows (CF) 18 000 R12 000 18 000 14 000 18 000 16 000 18 000 18 000 18 000 20 000 18 000 25 000 18 000 18 000 Press C R130 000 R50 000 30 000 20 000 20 000 20 000 30 000 40 000 50 000

Initial Investment (II) Year (t) 1 2 3 4 5 6 7 8 a. b. c. d. e. f. g. h. i.

Calculate the net present value (NPV) of each press. Using NPV, evaluate the acceptability of each press. Rank the presses from best to worst using NPV. Calculate the internal rate of return (IRR) of each press. Using IRR, evaluate the acceptability of each press. Rank the presses from best to worst using IRR. Calculate the payback (PB) of each press. Using PB, evaluate the acceptability of each press. Rank the presses from best to worst using PB.

Suggested solution for Press A: Step 1: Calculate the NPV: NPV = PVcf I.I NPV = 18 000 + 18 000 + up to the 8th period (1.15) (1.15) = R15 652 + R13 611 + R11 835 + R10 292 + R8 949 + R7 782 + R6 767 + R5 884 R85 000 = - R4 228

Step 2: Calculate the IRR: The cost of capital is 15% and the NPV is negative, so the IRR must be less than 15%. Estimate the IRR. Let us say, 14% and re-calculate the NPV at 14%: NPV = 18 000 + 18 000 + up to the 8th period (1.14) (1.14) = R15 789 + R13 850 + R12 150 + R10 657 + R9 349 + R8 201 + R7 193 + R6 310 R85 000 = - R1 501 This means that the IRR must be less than 14% and intuitively somewhere between 13% and 14%. This process could be repeated until the answer is obtained. Step 3: Calculate the payback period: As the cash flows are equal, the payback is calculated as follows: PB = I.I CF = 85 000 18 000 = 4.72 years

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