Sigma Pty. Ltd. is evaluating whether to buy pieces of medical equipment each of which requires...

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Finance

Sigma Pty. Ltd. is evaluating whether to buy pieces of medicalequipment each of which requires an up-front expenditure of $1.5million. The projects are expected to produce the following netcash inflows:
Year Equipment A Equipment B
1 $500,000 $2,000,000
2 $1,000,000 $1,000,000
3 $2,000,000 $600,000
a. What is the internal rate of return for each piece ofequipment?
b. What is the payback period for each machine?
c. What is the net present value of each machine if the cost ofcapital is 10 per cent? 5 per cent? 15 per cent?
d. Should Better Health buy both machines, only one, or none?Explain your answer

Answer & Explanation Solved by verified expert

4.1 Ratings (638 Votes)

a Equipment A Internal rate of return is the rate that makes NPV equal to 0 NPV 1500000 500000 1 R1 1000000 1 R2 2000000 1 R3 Using trial and error method ie after trying various values for R lets try R as 4397 NPV 1500000 500000 1 043971 1000000 1 043972 2000000 1 043973 NPV 0 Therefore IRR of equipment A is 4397 Equipment B Internal rate of return is the rate that makes NPV See Answer

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