Sun Ltd are about to replace some of its existing equipment. Two machine configu

Question

Sun Ltd are about to replace some of its existing equipment. Two machine configurations have been designed by the production engineering department, X1 and X2. Each configuration involves significant capital outlay with estimated cash flows over the next five years as follows: Assume that the machines have residual value of nil and the company's cost of capital is 10%. You need to calculate for each machine configuration: Net present value (NPV) Internal rate of return (IRR). Evaluate the configurations using the calculated indicators and provide recommendations on the machine configuration.

Explanation / Answer

a. NPV of X1 = 7407. NPV of X2 = -17422

b. IRR of X1 = 12.3%. IRR of X2 = 4.76%

c. X1 has a positive NPV and a higher IRR hence you should go with X1 configuration.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.