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Although I am able to get NPV-78 in Dec 2007 Q2 a, but I have problem understanding the explanation from” However ,demand becomes greater than production capacity in the 4th year of operation and so further investment in new machinery may be needed after three years…” to the end.
The question says “existing production capacity is limited to 1 million…”, So I thought every year demand become greater than production capacity. I just wonder the reason Why I have such a crazy idea:(( Q2 b IRR )I have problem understanding the solution ” However , the appraisal suffers from the limitations discussed in connection with NPV a ” .
Demand is greater than existing production capacity, which is precisely why they are buying a new machine!!
If they buy the new machine then it is only in the 4th year that demand is greater than the new total capacity.I am not sure I understand your second question.
In the examiners answer to part (a), in the two paragraphs below the calculation of the NPV he has stated the limitations of what we have done.
In his answer to part (b) he simply says that the same limitations apply to the IRR.
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