Norwich Tool's Lathe Investment Decision
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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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Solution Summary
The solution explains the use of capital budgeting techniques in making a decision between Lathe A and Lathe B by Norwich Tool
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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 ...
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