Answer:

Calculation of Net Present Value

Year Cash flow (in Rs. Lacs) PVF ( 10%,n) Total PV (Rs. In Lacs)

Machine A Machine B Machine A Machine B

0 -25 -40 1.00 -25 -40

1 - 10 0.91 - 9.10

2 5 14 0.83 4.15 11.62

3 20 16 0.75 15.00 12.00

4 14 17 0.68 9.52 11.56

5 14 15 0.62 8.68 9.30

NPV 12.35 13.58

Calculation of Profitability Index :

Machine A Machine B

𝑃𝑉 𝑜𝑓 𝑐𝑎𝑠ℎ 𝑖𝑛𝑓𝑙𝑜𝑤 37.35 53.58

=
𝑃𝑉 𝑜𝑓 𝑐𝑎𝑠ℎ 𝑜𝑢𝑡𝑓𝑙𝑜𝑤 25 40

= 1.494 1.339

Calculation of Pay Back Period :

Year Cash Inflows Cumulative Cash inflows

---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Machine A Machine B Machine A Machine B

0 -25 -40 - -

1 - 10 - 10

2 5 14 5 24

3 20 16 25 40
4 14 17 39 57

5 14 15 53 72

For both the cases , the Payback period is 3 years as cumulative cash inflow is equal to cash outflow
for both machine at the 3rd year.

Calculation of Discounted Payback period :

Year Present Value Cumulative present Value

___________________________________________________________________
Machine A Machine B Machine A Machine B
0 -25 -40 - -
1 - 9.10 - 9.10
2 4.15 11.62 4.15 20.72
3 15.00 12.00 19.15 32.72
4 9.52 11.56 28.67 44.28
5 8.68 9.30 37.35 53.58

From the cumulative present value table we found that discounted payback period lies in between
3rd and 4th year.
Machine A Machine B
25−19.15 40−32.72
Discounted Payback Period = 3 + = 3+
9.52 11.56
= 3.614 years = 3.629 years

Conclusion :

Machine A Machine B Choice

1. NPV 12.35 13.58 B
2. Profitability index 1.494 1.339 A
3. Payback period 3 years 3 years Indifferent
4. Discounted payback 3.614 years 3.629 years A
Since NPV is higher for machine B as compared to machine A and demand of product of Brown Metals
Ltd is rising rapidly, company should go for machine B with enhanced capacity which will further add
more value to the firm.