Running head: CAPITAL INVESTMENT DECISION1Capital Investment DecisionTo identify the right choice of equipment for Norwich Tools, the net present value (NPV) & internal rateof return (IRR) coupled with the payback period are utilized. Two different outcomes are elicited whenutilizing two varied costs of capital rates. Capital Investment DecisionMario Jackson was hired by Norwich Tools to identify or recognize new projects for the company as afinancial analyst. The new project identified involves purchasing equipments like two units of lathe. Toset-up the initial expenses & cash inflow, he utilized the NPV & IRR for each unit of lathe for a five-yearperiod before making certain of the new project. The data acquired were included in the sale of the twounits of lathe after the test period & the cost of capital.Financial LayoutThere are several steps to get through in order to make sure that they have made the best financialdecision for the company as regards to the Norwich Tool’s Lathe investment. The financial analyst has todecide between Lathe A complex or Lathe B basic. The purchased lathes would be used by the companyfor the next five years making it an essential decision for the company. The company has a majordilemma regarding lathe A complex which is more high-tech making its repairs a little more costly. Bothlathe A & B were added 13% capital expenses but decided to add a little more for lathe A for a total of15% capital expenses in case of costly repairs. A maximum payback on the fourth year since purchaseshould be expected as suggested by Norwich Tools. Cost of Capital & PaybackShown in the table below is about the 13% capital expenses & a four-year payback. The data will beutilized to get to the best option for the company.
CAPITAL INVESTMENT DECISION2YearLathe ACashFlowPVIF13%PVLathe BCashFlowPVIF13%,tPV1128,0000.885113,28088,0000.88577,8802182,0000.783142,506120,0000.78393,9603166,0000.693115,03896,0000.69366,5284168,0000.613102,98486,0000.61352,7185450,0000.543244,350207,0000.543112,402Total=718,158Total=403,487NPV (A) 718,158 – 660,000 = 58,158NPV (B) 403,487 – 360,000 = 43,487IRR = 16%IRR = 17%Payback: 4.04 yearsPayback: 3.65 yearsUtilized to verify the acceptability & relative ranking of lathe A & B is the payback period. The paybackperiod of lathe A takes more than four years. Thus, it was rejected. On the other hand, lathe B wasaccepted for the payback period took less than four years just as the company wanted. NPV is the nextsection to be identified. Assuming that there are equal risk utilizing capital budgeting methods; having perceived theacceptability & 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, utilizinglathe A has a higher NPV than lathe B during the five-year duration. So as regards with profit, lathe A is abetter choice. As regards with the IRR, both lathes passed the standards for they are more than 13%.