FIN 301 – Principles of FinanceExcel and Writing AssignmentAssignment Description:ABC Corporation...

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FIN 301 – Principles of FinanceExcel and Writing AssignmentAssignment 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 MachineYearCash Flow0-50,000131,500220,100318,900417,100513,700Option B: Buy a new MachineYearCash Flow0-400,000191,3002155,0003127,8004126,9005125,100You 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:Net Present Value (NPV)Internal Rate of Return (IRR)Profitability Index (PI)Payback Period (PB)Crossover RateThe 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: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.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: Week  5 Module 1  Ch 8 and Ch 11 (Week starting August 3rd)" >Next

Neenisha · Accepted Answer

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,

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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Year	Cash Flow
0	-400,000
1	91,300
2	155,000
3	127,800
4	126,900
5	125,100