So The NPV calculation is the given net cash that the company expects to make in the next 5 years.

(the projected net cash flows in the assignment) multiplied by the present values of the first 5 years
under the A2 table.

(PROJECT P VALUES MULTIPLIED BY PVIFI VALUES UNDER 13% = PV)

Year PROJECT P X PVIF 13% PV

2019 300 000 0.885 = XXX XXX
2020 320 000 0.783 = XXX XXX
2021 350 000 0.693 = XXX XXX
2022 400 000 0.613 = XXX XXX
2023 410 000 0.543 = XXX XXX

= XXX XXX

Less: Initial Investment 1 000 000

= XXX XXX (NPV)

STEPS

1. FIND THE FIRST 5 YEAR VALUES UNDER THE PRESENT VALUE INTEREST FACTOR TABLE A2 IN
THE TEXTBOOK AT THE GIVEN 13% COST OF CAPITAL AND MULTIPLY IT BY THE EXPECTED
RAND AMOUNTS FOR PROJECT P TO FIND THE PRESENT VALUE (PV)
2. ADD ALL THE PRESENT VALUES TOGETHER AND THEN MINUS THE INITIAL INVESTMENT OF
1 000 000. THIS WILL GIVE YOU THE NPV AT 13%.
3. NB!!! IF THE NPV > (is greater than 0 Rand), then the company can accept the project.

HERE YOU WILL FIND THE POSITIVE VALUE.

THEN FOLLOW THE SAME STEPS FOR PROJECT P AT THE ALTERNATIVE DISCOUNT RATE OF 25%. AS
STIPULATED IN THE ASSIGNMENT TO FIND THE NEGATIVE VALUE.

(AS YOU NEED A POSITIVE AND A NEGATIVE VALUE TO CALCULATE THE IRR FOR MACHINE Q)

YEAR PROJECT P PVIF 25% PV

2019 300 000 0.800 XXX XXX
2020 320 000 0.640 XXX XXX
2021 350 000 0.512 XXX XXX
2022 400 000 0.410 XXX XXX
2023 410 000 0.328 XXX XXX

= XXX XXX
(minus initial investment)

(-XXX XXX)

Here you will get a negative value

IRR

𝑷
Internal Rate of Return Formula = A + [ ] xB–A
𝑷+𝑵

IRR = 13% + [ 𝑃𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝑃𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝑉𝑎𝑙𝑢𝑒

𝑉𝑎𝑙𝑢𝑒+𝑁𝑒𝑔𝑎𝑡𝑖𝑣𝑒 𝑉𝑎𝑙𝑢𝑒
] x 25 % - 13%
IRR = 13 % + (XXX multiplied by 12%)
IRR = 13 % + (XXX)
IRR = XXX
(IF IRR > THEN THE COST OF CAPITAL THEN THE FIRM CAN ACCEPT THE INVESTMENT)
(IF IRR < THEN THE COST OF CAPITAL THEN THE FIRM MUST REJECT THE INVESTMENT)

IN 5.2 BASE YOUR RECOMMENDATION OFF THE INFORMATION OF 5.1.

Hint – A company will select the project with the highest POSITIVE NPV, so compare the information
of 5.1 and determine whether Border Engineering should invest in Project Q (NPV 80 640, IRR 16%)
or the calculated values of Project P.