Question

A company is contemplating to purchase a machine. Two machines A & B are available each costing $ 500,000. In computing profitability of the machines a discounted rate of 10% is to be used.

Cash Flows (Rs)

Year Machine A Machine B

1 1,50,000 50,000

2 2,00,000 1,50,000

3 2,50,000 2,00,000

4 1,50,000 3,00,000

5 1,00,000 2,00,000

  

Using NPV Method, indicate which m/c would be profitable?

Answer 1

Machine A is more profitable as it has higher NPV
Statement showing Cash flows			Machine A	Machine B
Particulars	Time	PVf 10%	Amount	PV	Amount	PV
Cash Outflows	-	1.00	(500,000.00)	(500,000.00)	(500,000.00)	(500,000.00)
PV of Cash outflows = PVCO				(500,000.00)		(500,000.00)
Cash inflows	1.00	0.9091	150,000.00	136,363.64	50,000.00	45,454.55
Cash inflows	2.00	0.8264	200,000.00	165,289.26	150,000.00	123,966.94
Cash inflows	3.00	0.7513	250,000.00	187,828.70	200,000.00	150,262.96
Cash inflows	4.00	0.6830	150,000.00	102,452.02	300,000.00	204,904.04
Cash inflows	5.00	0.6209	100,000.00	62,092.13	200,000.00	124,184.26
PV of Cash Inflows =PVCI				654,025.74		648,772.75
NPV= PVCI - PVCO				154,025.74		148,772.75