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Norwich Tool's Lathe Investment Decision

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Need help figuring this out. Please provide a DETAILED solution with calculations and formulas where needed. The answers should be pretty simple. Please use words in your explanation as well as formulas).

Prepare a 5-10 minute oral presentation accompanied by 5-7 Microsoft Powerpoint slides illustrating the Capital Investment Decisions Case Study.

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Norwich Tool

a. Payback period - Payback period is the time taken to recover the initial investment
Lathe A:
Years 1 - 4 = $644,000 ( this is the total amount recovered in year 1 to 4). The remaining amount is 660,000-644,000=16,000. This is to be recovered in year 5. In year 5, the total cash flow is 450,000. The fraction of year to recover 16,000 is 16,000/450,000
Payback = 4 years + ($16,000 ÷ $450,000) = 4.04 years
Lathe B:
Years 1 - 3 = $304,000. This is the total amount recovered in 3 years. The remaining amount is 360,000-304,000=56,000. This is to be recovered in year 4. In year 4 the cash flow is 86,000. The fraction of year taken to recover 56,000 is 56,000/86,000
Payback = 3 years + ($56,000 ÷ $86,000) = 3.65 years
The firm uses payback period of 4 years or less. In this case, Lathe A will be rejected and Lathe B will be accepted.

b. (1) NPV technique.

In this we discount the cash flows at 13% and subtract the initial investment to get the NPV
The table has the present value calculation for ...

Solution Summary

The solution explains the use of capital budgeting techniques in making a decision between Lathe A and Lathe B by Norwich Tool