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Solution
Machine Machine
A B
853 1049
Solution
Machine A: Both 17 and 18 percent
are giving positive and negative
NPVs, interpolation method can be
applied to find actual CRR
Machine B: Both 20 and 21 percent
give negative and positive NPVs
interpolation method can be used
Evaluation of IRR
Positive:
Considers time value of money
Takes total cash inflows into account
Easy to understand
No use of required rate of return (No
controversial calculation)
Maximising shareholder wealth
Evaluation of IRR
Drawback:
Tedious calculation
Produces multiple rates difficult to
handle
Mutually exclusive proposals, highest
IRR project selected leaving others
Assumption: All cash inflows are
reinvested
Profitability Index Method/ Benefit Cost ratio (B/C
Ratio)
Machine A Machine B
Rs.56,125 Rs.56,125
3375 11375
5
5375 9375
7375 7375
9375 5375
11375 3375
5