FIN 320 Week 5 Learning Team Capital Investment Decisions Case Study and Presentation PAPER ONLY - Running head CAPITAL INVESTMENT DECISION 1

FIN 320 Week 5 Learning Team Capital Investment Decisions Case Study and Presentation PAPER ONLY

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Running head: CAPITAL INVESTMENT DECISION 1 Capital Investment Decision To identify the right choice of equipment for Norwich Tools, the net present value (NPV) & internal rate of return (IRR) coupled with the payback period are utilized. Two different outcomes are elicited when utilizing two varied costs of capital rates. Capital Investment Decision Mario Jackson was hired by Norwich Tools to identify or recognize new projects for the company as a financial analyst. The new project identified involves purchasing equipments like two units of lathe. To set-up the initial expenses & cash inflow, he utilized the NPV & IRR for each unit of lathe for a five-year period before making certain of the new project. The data acquired were included in the sale of the two units of lathe after the test period & the cost of capital. Financial Layout There are several steps to get through in order to make sure that they have made the best financial decision for the company as regards to the Norwich Tool’s Lathe investment. The financial analyst has to decide between Lathe A complex or Lathe B basic. The purchased lathes would be used by the company for the next five years making it an essential decision for the company. The company has a major dilemma regarding lathe A complex which is more high-tech making its repairs a little more costly. Both lathe A & B were added 13% capital expenses but decided to add a little more for lathe A for a total of 15% capital expenses in case of costly repairs. A maximum payback on the fourth year since purchase should be expected as suggested by Norwich Tools. Cost of Capital & Payback Shown in the table below is about the 13% capital expenses & a four-year payback. The data will be utilized to get to the best option for the company.
CAPITAL INVESTMENT DECISION 2 Year Lathe A Cash Flow PVIF 13% PV Lathe B Cash Flow PVIF 13%,t PV 1 128,000 0.885 113,280 88,000 0.885 77,880 2 182,000 0.783 142,506 120,000 0.783 93,960 3 166,000 0.693 115,038 96,000 0.693 66,528 4 168,000 0.613 102,984 86,000 0.613 52,718 5 450,000 0.543 244,350 207,000 0.543 112,402 Total= 718,158 Total= 403,487 NPV (A) 718,158 – 660,000 = 58,158 NPV (B) 403,487 – 360,000 = 43,487 IRR = 16% IRR = 17% Payback: 4.04 years Payback: 3.65 years Utilized to verify the acceptability & relative ranking of lathe A & B is the payback period. The payback period of lathe A takes more than four years. Thus, it was rejected. On the other hand, lathe B was accepted for the payback period took less than four years just as the company wanted. NPV is the next section to be identified. Assuming that there are equal risk utilizing capital budgeting methods; having perceived the acceptability & ranking of lathe A & B utilizing the NPV & IRR is critical in the decision-making. Lathe A & B are good data for identifying the NPV for they are both greater than zero. Practically speaking, utilizing lathe A has a higher NPV than lathe B during the five-year duration. So as regards with profit, lathe A is a better choice. As regards with the IRR, both lathes passed the standards for they are more than 13%.

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