XYZ is a company located in Italy, the company manufactures machine parts. It is currently involved...

60.1K

Verified Solution

Question

Finance

XYZ is a company located in Italy, the company manufacturesmachine parts. It is currently involved in making a decisionconcerning the acquisition of new machining tool. Two differentversions of the tool are available: X AND Y. The forecasted cashflows of the two alternative are listed below; XYZ normally usespayback with a 3-year criterion. NET CASH FLOWS ($000s) Tool X Year0 -1000, Year 1 +400, Year 2 +600, Year 3 +187, Tool Y Year 0 -450,Year 1+300, Year 2+150, Year 3+106. XYZ faces a perfect capitalmarket, in which the interest rate for the projects' risk level is5%. Required: (a) Using the Payback and the IRR decisions rule,indicate which projects the company should accept and state clearlythe reasons for your decisions. (b) How would your conclusions in(a) will change if the projects were mutually exclusive? (c) Stateclearly any limitations and assumptions that you made in yourcalculations.

Answer & Explanation Solved by verified expert

4.1 Ratings (546 Votes)

a Tool X Year 0 1000 Year 1 400 Year 2 600 Year 3 187 Initial investment 1000 year 1 income 400 remaining investment to get 600 year 2 income 600 so totally it took 2 years to get back the initial investment Similarily for TOOL Y Year 0 450 Year 1300 Year 2150 Year 3106 It takes See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

XYZ is a company located in Italy, the company manufacturesmachine parts. It is currently involved in making a decisionconcerning the acquisition of new machining tool. Two differentversions of the tool are available: X AND Y. The forecasted cashflows of the two alternative are listed below; XYZ normally usespayback with a 3-year criterion. NET CASH FLOWS ($000s) Tool X Year0 -1000, Year 1 +400, Year 2 +600, Year 3 +187, Tool Y Year 0 -450,Year 1+300, Year 2+150, Year 3+106. XYZ faces a perfect capitalmarket, in which the interest rate for the projects' risk level is5%. Required: (a) Using the Payback and the IRR decisions rule,indicate which projects the company should accept and state clearlythe reasons for your decisions. (b) How would your conclusions in(a) will change if the projects were mutually exclusive? (c) Stateclearly any limitations and assumptions that you made in yourcalculations.