- Problem Recognition
Nitrogen plant management wants to increase plant production. They decided to upgrade the plant by purchasing new high speed machine. They got two quotations from vendor. Management decided to use Internal Rate Return (IRR) and Net Present Value (NPV) to decide which option is worth to invest in? Management want to know the profitability of which investment is most attractive.
2 Development the Feasible Alternative
Vendor offers two quotations for two different machines:
- Machine A cost $15000 US dollars
- Machine B cost $20000 US dollars
3 Development of the Outcome for Alternative
Microsoft Excel will be used to calculate cash flow, present value & net present value (NPV) after that Internal Rate of Return for each option.
4 Selection of Criteria
The option with highest positive NPV & IRR will be considered.
5 Analysis and Comparison of the Alternative
Table-1 represent option for purchase machine A, Table-2 represent option for purchase machine B.
6 Selection of the Preferred Alternative
From the tables above, Machine B has the highest positive NPV also has the highest IRR. Option of purchase Machine B is the most attractive investment.
7 Performance Monitoring and the Post Evaluation of Result
In the next blog same example will be used to calculate MARR for the investment and compare it with MARR in Oman.
- Lecture 14 & 15: Internal Rate of Return retrieved on July 18 2014 http://users.iems.northwestern.edu/~sgolbeck/IEMS326/Lecture15_16.pdf
- ECLT 5930/SEEM5740 :Engineering Economics retrieved on July 18 2014 http://www1.se.cuhk.edu.hk/~eclt5930/Lecture6.pdf
- How to Calculate IIR retrieved on July 18 2014 http://www.ehow.com/how_7493222_calculate-iir.html
- How to Calculate NPV and IRR retrieved on July 18 2014 http://www.ehow.com/how_6746269_calculate-npv-irr.html