Pay Back period,IRR and NPV
Not what you're looking for?
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.
Choose one metric to begin with (payback, for example). State the pros & cons, the decision (accept/reject) criteria, and whether or not you would accept the project and why (support this with the figures provided). Then, move on to the next metric (NPV, for example) and do the same thing, for all three metrics.
Purchase this Solution
Solution Summary
The solution contains acceptance or rejection of the project by using capital budgeting techniques viz., pay back period, Net present value and Internal rate of return.
Solution Preview
Dear student,
Pay back period;
Pay back period is the period of time required to recover the initial investment. This is computed by the following formula:
Payback period; Initial investment/ annual cash inflow
Annual cash inflow; 355000
Payback period: 1300000/355000=3.66 years
In this issue, payback perid is 3.66 years .Therefore, the company can make the purchase of the equipment as the initial investment in the equipment will be recovered from the cash inflows from the equipment in 3.66 years .However, the equipment can provide ...
Purchase this Solution
Free BrainMass Quizzes
Lean your Process
This quiz will help you understand the basic concepts of Lean.
Writing Business Plans
This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.
Team Development Strategies
This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.
Employee Orientation
Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.
Accounting: Statement of Cash flows
This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.