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FIN 301 – Principles of Finance Excel and Writing Assignment Assignment Description: ABC Corporation has a machine that requires repairs or should be replaced. ABC has evaluated the two options and...

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FIN 301 – Principles of Finance

Excel and Writing Assignment

Assignment Description:

ABC Corporation has a machine that requires repairs or should be replaced. ABC has evaluated the two options and calculated the cash flows resulting from each option as follows:

Option A: Repair the Machine

Year

Cash Flow

0

-50,000

1

31,500

2

20,100

3

18,900

4

17,100

5

13,700

Option B: Buy a new Machine

Year

Cash Flow

0

-400,000

1

91,300

2

155,000

3

127,800

4

126,900

5

125,100

You have recently been hired by ABC Corporation and your first assignment is to help them decide which of these two options should be pursued. You would like to apply Capital Budgeting and Time Value of Money concepts you have learnt in FIN 301 to analyze the problem and present your recommendation to your boss, Ms. Jane Austen.

Conduct the analysis by calculating the following for each option:

  1. Net Present Value (NPV)
  2. Internal Rate of Return (IRR)
  3. Profitability Index (PI)
  4. Payback Period (PB)
  5. Crossover Rate

The company has a Weighted Average Cost of Capital (WACC) (discount Rate) of 12%. For this analysis, your boss John Doe asked you to calculate NPV at three different discount rates: 12% (the current WACC), 14% and 16%.

Things to turn in:

  1. A one-page memo explaining the results of your analysis and your recommendation. The memo should include important results of your analysis such as a summary table or graph. The memo is limited to one page so be very selective on what information to include.
  2. An Excel spreadsheet showing calculation of above at the 3 discount rates and graph on NPV Profile. Assume benchmark for payback period. Write =if( ) statements to offer dynamic decisions. Please do not use numbers while writing formulas rather give cell references.
HW CH.8" >PreviousNext Module:
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Answered Same Day Aug 10, 2021

Solution

Neenisha answered on Aug 13 2021
145 Votes
Principles of Finance
We have two projects – Option A – Repair the Machine and Option B – Buy a New Machine. The cash flow from both the projects for next 5 years are shown as follows.
    OPTION A: REPAIR THE MACHINE
    0
    1
    2
    3
    4
    5
     (50,000)
    31,500
    20,100
    18,900
     17,100
    13,700
    OPTION B: BUY A NEW MACHINE
    0
    1
    2
    3
    4
    5
    (4,00,000)
    91,300
    1,55,000
    1,27,800
     1,26,900
    1,25,100
Internal Rate of Return and Profitability Index
For both the option we have computed Internal Rate of Return (IRR) and Profitability Index (PI). The IRR of Option A is 35.32% which is higher than the Option B. Also, the profitability for Option A i.e. repairing the machine is higher as the initial investment is less and cash flows are still decent.
     
    Option A
    Option B
    Internal Rate of Return (IRR)
    35.32%
    16.56%
    Profitability Index (PI)
    52.48%
    11.92%
Three Scenarios – NPV and Payback period Calculation
Case 1
    WACC
    12%
    
    
    
    
     
    Option A
    Option B
    Net Present Value (NPV)
    26,242.35
    47,680.77
    Payback Period (PB) (Discounted) - Option A
     
    0
    1
    2
    3
    4
    5
    Cash Flows
     (50,000)
     31,500
     20,100
     18,900
     17,100
     13,700
    Discounted Cash Flows
     (50,000)
     28,125
     16,024
     13,453
     10,867
     7,774
    Cumulative Cash Flows
     (50,000)
     (21,875)
     (5,851)
     7,601
    
    
    
    
    
    
    
    
    
    Payback Period
     2.43
    
    
    
    
    
    Payback Period (PB) (Discounted) - Option B
     
    0
    1
    2
    3
    4
    5
    
     (4,00,000)
     91,300
     1,55,000
     1,27,800
     1,26,900
     1,25,100
    Discounted Cash Flows
     ...
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