Question

NailPaints, which specialises in unique nail designs, is considering the purchase of either one of two machines, A or B. Machine A costs RM50,000, and is able to utilise only a limited range of popular colours and will return RM65,000 in one year. Machine B costs RM100,000 and utilises a much wider range of colours, including colours that are not very popular. Machine B is expected to return RM125, 000 in a year.

Additional information:

The discount factor for 1 year, at 10%, is 0.909.

NailPaints’ capital budget is RM100,000 and any unallocated funds will be placed in a bank account that earns 5% per annum.

Required:

1. Compute the net present value (NPV) for machines A and B, respectively. Which of these machines should the firm choose, based on NPV only?

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2. Compute the internal rate of return (IRR) for machines A and B, respectively. Which of these machines should the firm choose, based on IRR only?

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3. Based on your answers to a. and b. discuss which of these machines should NailPaints invest in? You must justify your stance.

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4. Discuss any two additional factors, apart from numerical computations, that could help the managers to decide between choosing machines A and B.

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(3 + 3 + 4 + 6 = 16 marks)

Answer 1

If 50000 can be deposited more than 5% it would be better Or use only 50000 the A is better.

answered by: anonymous