Question
Q1-HY Company is planning to install a new machinery that will cost RO50,000 and has a useful life of 5 years with RO2000 salvage value.
Q1-HY Company is planning to install a new machinery that will cost RO50,000 and has a useful life of 5 years with RO2000 salvage value. The CFAT from the investment for the five years will be RO10,000 (Year 1), RO12,000 (Year 2), RO14,000 (Year 3), RO16,000 (Year 4) and RO14,000 Year 5. The minimum return expected (hurdle rate) is 12%. You are requested to calculate Internal Rate of Return and Advise the management whether to accept the proposal or not?
Q2- A Bank has received a proposal from a petroleum company to finance the purchase of new machine for its future expansion. The new machine requires an investment outlay of RO.200,000. The machine has an expected life of 5 years with no salvage value. The machine is expected to generate CFAT of RO. 40,000, RO. 50,000, RO. 60,000, RO. 80,000 and RO. 90,000 at the end of year1, 2, 3,4 and 5 respectively. If the Hurdle rate is 12%, advise the bank whether to finance the purchase of machinery or not, using Internal Rate of Return
Q2-
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