Exercise #4

Exercise #4 - Finance 351: Financial Management Instructor:...

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1 Finance 351: Financial Management Instructor: Shuming Liu In-Class Exercise 4 Solution to Minicase for Chapter 8 None of the measures in the summary tables is appropriate for the analysis of this case, although the NPV calculations can be used as the starting point for an appropriate analysis. The payback period is not appropriate for the same reasons that it is always inappropriate for analysis of a capital budgeting problem: cash flows after the payback period are ignored; cash flows before the payback period are all assigned equal weight, regardless of timing; the cutoff period is arbitrary. The internal rate of return criterion can result in incorrect rankings among mutually exclusive investment projects when there are differences in the size of the projects under consideration and/or when there are differences in the timing of the cash flows. In choosing between the two different stamping machines, both of these differences exist. The net present value calculations indicate that the Skilboro machines have a greater NPV ($2.56
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Exercise #4 - Finance 351: Financial Management Instructor:...

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