Summarize Making Norwich Tool's Lathe Investment Decision
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Summarize Making Norwich Tool's Lathe Investment Decision case in Ch. 9 of Principles of Managerial Finance.
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Norwich Tool's Lathe Investment Decision
The case requires Mario Jackson to perform financial analysis on two lathes-lathe A and lathe B to recommend Norwich Tool on which lathe to select for replacement of old lathe. Mario has all the relevant data that would be used to perform analysis. Initial investment for lathe A is $660,000 and for lathe B it is $360,000. Cash flows associated with each lathe have also been identified for a five-year period. However, Mario feels that lathe A, because of its high cost would be more sophisticated and would have higher chance of breakdown. To overcome the dilemma, firm's cost of capital is used for analysis.
a. The first tool to be used in the analysis is payback period. Payback period is the time required to recover the initial investment of the initial cash outlay. The formula for calculating the payback period is:
Payback period = year before recovery + uncovered cost at the start of the year
Cash flow during the year
For lathe A, the payback period is 4+ (16000/450000) = 4.035 years
For lathe B, the payback period is 3 + ...
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