Purchase Solution

CU Boxes Inc. - NPV, IRR, and Payback

Not what you're looking for?

Ask Custom Question

CU Boxes Inc. makes boxes for shoe manufacturers. One of the machines that CU uses may need replacement. The following information is available to you:
Revenues will not change if the machine is replaced.
Both the present machine and the new machine will last 5 years and will have no disposal value in five years.
The new machine will cost $2,000,000. The old machine can be disposed of right now for a disposal value of $60,000.
The new machine will reduce operating costs by $600,000 per year (assume cash flows at the end of the years.)

Assume a required rate of return or discount rate of 9%

Part 1: Determine if the new machine should be purchased. Use NPV, IRR, and Payback in your analysis where appropriate.
Part 2: What method (NPV or others) is the best method to use for capital budgeting purposes? Defend your arguments carefully, and take into account the following among other concerns:
a) Ease of use
b) Quality of information from such method
c) Quantity of information from such method

Attachments
Purchase this Solution
Solution Summary

Response is about 400 words plus four references.

Solution Preview

The investment decisions of a firm are generally known as the capital budgeting, or capital expenditure decisions. The firm's investment decisions would generally include expansion, acquisition, modernization and replacement of the long-term assets. Sale of a division or business (divestment) is also as an investment decision.
Decisions like the change in the methods of sales distribution, or an advertisement campaign or research and development programs have long-term implications for the firm's expenditures and benefits, and therefore, they should also be evaluated as investment decisions. Several different procedures are available to analyze potential business investments. Some concepts are better than others when it comes to reliability but all provide enough information to get the general scope of the investment.
NPV is defined as the difference between an investment's market value and its cost. It is only a good investment if it makes money for the company so a positive NPV will be needed. Following steps have to be followed:
? Cash flows of the investment project should be forecasted based on realistic assumptions.
? Appropriate discount rate should be identified to discount the forecasted cash flows. The appropriate discount rate is the project's opportunity cost of capital.
? Present value of cash flows should be calculated using the opportunity cost of capital as the discount rate.
Net present value should be found out by subtracting present value of cash outflows from present value of cash inflows. The project should be accepted if NPV is positive (i.e., NPV > ...

Purchase this Solution
Free BrainMass Quizzes
Basic Social Media Concepts

The quiz will test your knowledge on basic social media concepts.

Organizational Leadership Quiz

This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.

IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

Managing the Older Worker

This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce

View More Free Quizzes
Related BrainMass Solutions

  • Project's Payback period, NPV, PI, and IRR.

    605741 Project's Payback period, NPV, PI, and IRR. You are considering a project with an initial cash outlay of $80,000 and expected free cash flows of $20,00 at the end of each year for 6 years.

  • Capital budgeting

    264478 Good Foods, Inc: Calculate payback period, NPV, IRR, PI, MIRR USE THE FOLLOWING DATA FOR THE NEXT EIGHT PROBLEMS: .

  • Calculating Payback, NPV and IRR

    503746 Calculating Payback, NPV and IRR Winston Clinic is evaluating a project that costs $52,125 and has expected net cash flows of $12,000 per year for eight years.

  • Capital Budgeting and Forecasting Models

    525526 Calculate the payback period, IRR and NPV values for the given case. Corn Doggy, Inc. produces and sells corn dogs. The corn dogs are dipped by hand.

  • Payback methods, IRR, and Right Discount Rate

    What general principle does this example illustrate regarding a project's life, its discounted payback period, and its NPV?

  • Capital Budgeting Problems- NPV, IRR, Payback

    424693 Finance: Project's forecasted NPV; IRR vs NPV; Payback period See attached file for tables. 1) Last month, Lloyd's Systems analyzed the project whose cash flows are shown below.

  • Mutually Exclusive Projects and Net Cash Flow

    The total time taken to recover 200 is 1.6 years which is the payback. 6. The NPV was calculated in part 4 and it is $37.57 7. IRR is the discounting rate that will make the NPV=0. We can calculate the IRR using the IRR function in excel.

  • Payback method for capital budgeting decisions

    NPV for S = $291.74 and IRR for S = 17.86% NPV for L = $500.81 and IRR for L = 15.78% These projects S and L are mutually exclusive and non-repeatable, so we must choose one only.

  • NPV, IRR and payback

    The solution explains how to calculate NPV, IRR and payback period

View More Related Solutions