2 I would recommend Lathe B if the firm has capital rationing because Lathe B

2 i would recommend lathe b if the firm has capital

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(2) I would recommend Lathe B if the firm has capital rationing because Lathe B has a higher percent of return. The lathe will not net as much money in profits but will cost less moneyto purchase and will produce a larger percentage of return on the investment. This would place Lathe B in higher priority than Lathe A.
Capital Investment Decisions – Norwich Tool’s8d. Determining the Net Present Value for Norwich Tool’s LatheFirm’s cost of capital 15%13%YearYear-End Cash FlowLathe ALathe B0$ (660,000)$ (360,000)1$ 128,000$ 88,0002$ 182,000$ 120,0003$ 166,000$ 96,0004$ 168,000$ 86,0005$ 450,000$ 207,000NPV$ 17,854$ 43,483CHOICE OF PROJECTPROJECT BDetermining the Internal Rate of Return for Norwich Tool’s LatheFirm’s cost of capital15%13%YearYear-End Cash FlowLathe ALathe B0$ (660,000)$ (360,000)1$ 128,000$ 88,0002$ 182,000$ 120,0003$ 166,000$ 96,0004$ 168,000$ 86,0005$ 450,000$ 207,000IRR$ 15.945%$ 17.338%Choice of projectProject Be.Due to Lathe A having a higher NPV than Lathe B, the better choice for the company wasLathe B. Lathe B was chosen because it had a faster payback period and a higher IRR. Due to Lathe B having a higher IRR and a quicker payback period, it was the preferred choice instead of
Capital Investment Decisions – Norwich Tool’s9Lathe A. Of course, the negative capital return of Lathe A was one of the reasons as to why LatheB would be the better choice for the company. Other than the negative financial impact of Lathe A, there is also the fact that because there is new equipment involved, there is a possibility that the equipment can malfunction at any time. Repair costs will definitely bring forth more cost for than the company as opposed to more revenue.
Capital Investment Decisions – Norwich Tool’s10ReferencesGitman, L. (2006). Principles of Managerial Finance(brief 4thed.). Addison Wesley: Pearson Education Company.

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