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Schultz Inc. is deciding to automate either its Molding department or its Finishing department. Funds are...

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Accounting

Schultz Inc. is deciding to automate either its Molding departmentor its Finishing department. Funds are only available for oneautomation. You must decide which department will be automated. Theoriginal cost, net cash inflows, and hurdle rates are shown belowfor each project. Calculate the payback period, internal rate ofreturn, and net present value for each project. Then decide whichdepartment you would choose to automate based on this information.Explain your answer. Calculations and explanations can be given onthis worksheet.
Molding
Hurdle Rate:14%
Original Cost:$       (845,000)
Net Cash Inflows:
Year 1$        267,000
Year 2          245,000
Year 3          221,000
Year 4          215,000
Year 5          190,000
Year 6          168,000
Payback period:
Internal Rate of Return:
Net Present Value:   
   

Answer & Explanation Solved by verified expert
4.3 Ratings (697 Votes)

Molding
Hurdle Rate: 14% Cumulative Cash flows PVIF at 14% PV at 14% PVIF at 15% PV at 15% PVIF at 16% PV at 16%
Original Cost: -845000 -845000 1 -845000 1 -845000 1 -845000
Net Cash Inflows:
Year 1 267000 -578000 0.87719 234211 0.86957 232174 0.86207 230172
Year 2 245000 -333000 0.76947 188520 0.75614 185255 0.74316 182075
Year 3 221000 -112000 0.67497 149169 0.65752 145311 0.64066 141585
Year 4 215000 103000 0.59208 127297 0.57175 122927 0.55229 118743
Year 5 190000 293000 0.51937 98680 0.49718 94464 0.47611 90461
Year 6 168000 461000 0.45559 76539 0.43233 72631 0.41044 68954
29415 7762 -13009
Payback period: = 3+112000/215000 = 3.52 Years
Internal Rate of Return: = 15+7762/(7762+13009)= 15.37%
Net Present Value: $29415
NOTE:
DETAILS FOR THE FINISHING DEPARTMENT NOT GIVEN.

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