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    Financial Management for On Your Mark: Metrics

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    On Your Mark is considering purchasing new manufacturing equipment that costs $1,300,000 and is expected to improve cash flows by the following values:

    $500,000 in year 1
    $350,000 in year 2
    $475,000 in year 3
    $450,000 in year 4
    $300,000 in year 5

    Key financial metrics for this capital budgeting project have been calculated and provided by the finance department (see below). A 14% rate of return and a payback period of less than 5 years are required for the project.

    These key metrics use 6% as the weighted average cost of capital and must include the following:

    Payback period
    Net present value
    Internal rate of return

    ***In a memo to the CFO, discuss the metrics, and make a recommendation regarding whether the company should accept or reject the project.

    Year 0 ($1,300,000)

    Year 1 500,000 438,596 150,768 19% (800,000) 17%

    Year 2 350,000 269,314 (450,000)

    Year 3 475,000 320,611 25,000

    Year 4 450,000 266,436 475,000

    Year 5 300,000 155,811 775,000

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    Solution Preview

    Dear CFO,
    First, you should accept the project. It earns more than the required 14% and the payback of the initial investment occurs in year 3. This more than meets your requirements. Let me tell you the metrics I used to figure out that the project earns what is needed.

    Let's start with NPV. I laid out the cash flows by year (first column). This shows me the anticipated in and out flows of cash for the project. Next, I discounted those future amounts back into current dollars using 14% require return. This is the second column. I then used the outflow of $1,300,000 which is in ...

    Solution Summary

    Your response is a memo with 391 words and gives a decision, a description of the three measures, what they tell you, and how to interpret the results.