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.
PV PV IRR PAYBACK MIRR
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 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.
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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 ...
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