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# Metrics whether to accept or reject the project

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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 \$500,000 in year 1, \$350,000 in year 2, \$475,000 in year 3, \$450,000 in year 4, and \$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 five years are required for the project. These key metrics must include (1) payback period, (2) net present value, and (3) internal rate of return. (Use 6% as the weighted average cost of capital).

Year 0
Year 1
Year 2
Year 3
Year 4
Year 5

(1,300,000)
500,000
350,000
475,000
450,000
300,000

pv

438,596
269,314
320,611
266,436
155,811

NPV

150,768

IRR

19%

payback

800,000
450,000
(25,000)
(475,000)
(775,000)

MIRR

17%

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

#### Solution Preview

The On Your Mark problem listed above is apparently identical to the following Student Marks problem.

Strident Marks is considering purchasing new manufacturing equipment that costs \$1,300,000 and is expected to improve cash flows by \$500,000 in year 1, \$350,000 in year 2, \$475,000 in year 3, \$450,000 in year 4, and \$300,000 in year 5.
Calculate key financial metrics for this capital budgeting project. Assume a 14% rate of return for the project. These key metrics must include

(1) payback period, (2) net present value, (3) internal rate of return and (4) modified rate of return. (Use 6% as the finance rate, and 14% as the reinvest rate.)

0 1 2 3 4 5
CASH FLOWS -1300000 500000 350000 475000 450000 300000

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, modernisation 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 a research and development programme
have long-term implications for the firm's expenditures and benefits, ...

#### Solution Summary

This discusses the metrics of whether to accept or reject the project in about 700 words with references.

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