Company MB must decide whether to purchase a piece of factory equipment for 510,

Question

Company MB must decide whether to purchase a piece of factory equipment for 510,000 TL. The equipment would only last four years, but it is expected to generate 170,000 TL of addition annual profit during those years. Company MD also thinks it can sell the equipment for scrap afterward for about 46,000 TL. The company uses a minimum attractive rate of return of 8%. a) What is the capital recovery of this equipment?(TL) b) What is the AW of this equipment?(TL) . c) Would you purchase the equipment based on the AW you calculate in (a) ? d) What is the IRR of this equipment? (%) e) Would you purchase the equipment based on the IRR you calculated in (c)? Please you answer by explaining.

Explanation / Answer

Investment = 510000

capital recovery = -510000*PMT(8%,4,-1) + 46000*PMT(8%,4, ,-1)

   =  -510000*0.3 + 46000*0.22

= -143771.25

Annual Worth (AW) = Capital recovery + 170000

= -143771.25 + 170000 = 26228.75

Yes, As AW is poistive

IRR need to calculate using excel, writing excel fromula here

IRR = =IRR({-510000,170000,170000,170000,216000}) = 15.15%

IRR > Minimum return, hence purchase the eqipment

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