A company is considering the replacement of its existing machine which is obsolete and unable to...

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Finance

A company is considering the replacement of its existing machinewhich is obsolete and unable to meet the rapidly rising demand forits product. The company is faced with two alternatives: (i) to buyMachine A which is similar to the existing machine or (ii) to buyMachine B which is more expensive and has greater capacity. Thecash flows at the present level of operations under the twoalternatives are as follows:
0
1
2
3
4
5
Machine A (in $1000)
-26
0
6
20
15
14
Machine B (in $1000)
-40
9
15
16
17
18
The company’s cost of capital is 7%. The finance manager asksyou to evaluate the machines by calculating the following: 1.NetPresent Value; 2. Payback period; and 3. the IRR.
Show your calculation results to the finance manager, who isstill unable to make up his mind as to which machine to recommend.What advice would you give about the proposed investment?
HINT: Use the NPV calculator linked on the left-hand side of thepage.
If you use excel’s NPV function, do not forget you shouldinclude only the cash inflows (in the values line) and when you getan answer, you must deduct the cost of the machine to get the finalNPV.

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Transcribed Image Text

A company is considering the replacement of its existing machinewhich is obsolete and unable to meet the rapidly rising demand forits product. The company is faced with two alternatives: (i) to buyMachine A which is similar to the existing machine or (ii) to buyMachine B which is more expensive and has greater capacity. Thecash flows at the present level of operations under the twoalternatives are as follows:012345Machine A (in $1000)-2606201514Machine B (in $1000)-40915161718The company’s cost of capital is 7%. The finance manager asksyou to evaluate the machines by calculating the following: 1.NetPresent Value; 2. Payback period; and 3. the IRR.Show your calculation results to the finance manager, who isstill unable to make up his mind as to which machine to recommend.What advice would you give about the proposed investment?HINT: Use the NPV calculator linked on the left-hand side of thepage.If you use excel’s NPV function, do not forget you shouldinclude only the cash inflows (in the values line) and when you getan answer, you must deduct the cost of the machine to get the finalNPV.

	0	1	2	3	4	5
Machine A (in $1000)	-26	0	6	20	15	14
Machine B (in $1000)	-40	9	15	16	17	18