The cash flow schedule is confusing with all carrying negative sign
So i am assuming that the first year cash flow (first row) is an outflow and other cash flows mentioned in following rows are inflows (positive cashflows)
Interest rate/discount rate = 10%
By calculating the PV of cashflows in each of the year (calculations below) using formula PV = FV/(1+10%)^n
PV Calculation | ||||
Machine A | Machine B | Machine A | Machine B | |
10% | 10% | |||
-40000 | -55000 | PV =-40000 [-40000/(1+10%)^0] | PV =-55000[-55000/(1+10%)^0] | |
15000 | 10000 | PV =13636.36 [15000/(1+10%)^1] | PV = 9090.91[10000/(1+10%)^1] | |
15000 | 10000 | PV =12396.69[15000/(1+10%)^2] | PV = 8264.46[10000/(1+10%)^2] | |
15000 | 10000 | PV =11269.72[15000/(1+10%)^3] | PV = 7513.15[10000/(1+10%)^3] | |
10000 | PV = 6830.13[10000/(1+10%)^4] | |||
NPV | -2697.22 | -23301.35 | ||
IRR | 6.13% | -11.62% |
By NPV analysis, Machine A as lesser NPV compared to Machine B (however, both machines have negative NPV)
IRR calculation; we can calculate IRR only by trial and error method in excel or by using the formula in excel. By trial and error method, IRR of machine A is positve i.e. 6.13%, however for Machine B, IRR is negative i.e. -11.62% This means that sum of all cash flows is negative (even without discounting)
So we will choose machine A as it has a postive IRR%
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1 11,200 10,400
2 11,200 10,400
3 11,200+ replace 10,400
4 10,400 + replace
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