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Minicase Flowton Products enjoys a steady demand for stainless steel infiltrators used in a number of chemical processes.

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Minicase
Flowton Products enjoys a steady demand for stainless steel infiltrators used in a number of chemical processes. Revenues from the infiltrator division are $50 million a year and production costs are $47.5 million. However, the 10 high-precision Munster stamping machines that are used in the production process are coming to the end of their useful life. One possibility is simply to replace each existing machine with a new Munster. These machines would cost $800,000 each and would not involve any additional operating costs. The alternative is to buy 10 centrally controlled Skilboro stampers. Skilboros cost $1.25 million each, but compared to the Munster, they would produce a total saving in operator and material costs of $500,000 a year. Moreover, the Skilboro is sturdily built and would last 10 years, compared with an estimated 7-year life for the Munster.
Analysts in the infiltrator division have produced the accompanying summary table, which shows the forecast total cash flows from the infiltrator business over the life of each machine. Flowton's standard procedures for appraising  capital investments involve calculating net present value, internal rate of return, and payback, and these measures are also shown in the table.
As usual, Emily Balsam arrived early at Flowton's head office. She had never regretted joining Flowton. Everything about the place, from the mirror windows to the bell fountain in the atrium, suggested a classy outfit. Ms. Balsam sighed happily and reached for the envelope at the top of her in-tray. It was an analysis from the infiltrator division of the replacement options for the stamper machines. Pinned to the paper was the summary table of cash flows and a note from the CFO, which read, "Emily, I have read through 20 pages of excruciating detail and I still don't know which of these machines we should buy. The NPV calculation seems to indicate that the Skilboro is best, while IRR and payback suggest the opposite. Would you take a look and tell me what we should do and why."
Can you help Ms. Balsam by writing a memo to the CFO? You need to justify your solution and also to explain why some or all of the measures in the summary tables are inappropriate.

Minicase
Flowton Products enjoys a steady demand for stainless steel infiltrators
used in a number of chemical processes. Revenues from the infiltrator
division are $50 million a year and production costs are $47.5 million.
However, the 10 high-precision Munster stamping machines that are used
in the production process are coming to the end of their useful life.
One possibility is simply to replace each existing machine with a new
Munster. These machines would cost $800,000 each and would not involve
any additional operating costs. The alternative is to buy 10 centrally
controlled Skilboro stampers. Skilboros cost $1.25 million each, but
compared to the Munster, they would produce a total saving in operator
and material costs of $500,000 a year. Moreover, the Skilboro is
sturdily built and would last 10 years, compared with an estimated
7-year life for the Munster.
Analysts in the infiltrator division have produced the accompanying
summary table, which shows the forecast total cash flows from the
infiltrator business over the life of each machine. Flowton’s standard
procedures for appraising capital investments involve calculating net
present value, internal rate of return, and payback, and these measures
are also shown in the table.
As usual, Emily Balsam arrived early at Flowton’s head office. She had
never regretted joining Flowton. Everything about the place, from the
mirror windows to the bell fountain in the atrium, suggested a classy
outfit. Ms. Balsam sighed happily and reached for the envelope at the
top of her in-tray. It was an analysis from the infiltrator division of
the replacement options for the stamper machines. Pinned to the paper
was the summary table of cash flows and a note from the CFO, which read,
“Emily, I have read through 20 pages of excruciating detail and I
still don’t know which of these machines we should buy. The NPV
calculation seems to indicate that the Skilboro is best, while IRR and
payback suggest the opposite. Would you take a look and tell me what we
should do and why.”
Can you help Ms. Balsam by writing a memo to the CFO? You need to
justify your solution and also to explain why some or all of the
measures in the summary tables are inappropriate.
Cash Flows, Millions of Dollars
Year: 0
1-7 8 9
10
Munster
Investment -8.0
Revenues
50.0 0 0
0
Costs
47.5 0 0
0
Net cash flow -8.0
2.5 0 0
0
NPV at 15% $2.40 million
IRR 24.5%
Payback period 3.2 years
Skilboro
Investment -12.5
Revenues
50.0 50.0 50.0
50.0
Costs
47.0 47.0 47.0
47.0
Net cash flow -12.5
3.0 3.0 3.0
3.0
NPV at 15% $2.56 million
IRR 20.2%
Payback period 4.2 years

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