500–750 words Details: On Your Mark is considering purchasing new manufacturing

Question

500–750 words
Details: On Your Mark is considering purchasing new manufacturing equipment that costs $1,300,000 and is expected to improve cash flows by the following values:
• $500,000 in year 1
• $350,000 in year 2
• $475,000 in year 3
• $450,000 in year 4
• $300,000 in year 5
Key financial metrics for this capital budgeting project have been calculated and provided by the finance department (see below). A 14% rate of return and a payback period of less than 5 years are required for the project.
These key metrics use 6% as the weighted average cost of capital and must include the following:
• Payback period
• Net present value
• Internal rate of return
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
($1,300,000) 500,000 350,000 475,000 450,000 300,000
pv 438,596 269,314 320,611 266,436 155,811
NPV 150,768
IRR 19%
payback 800,000 450,000 (25,000) (475,000) (775,000)
MIRR 17%

In a memo to the CFO, discuss the metrics, and make a recommendation regarding whether the company should accept or reject the project.

Explanation / Answer

The comapny can accept the above project proposal: because of: 1) As per pay back method the cash inflows can be collected back with in 3 years only. that is year 1-500000+year 2-350000+year 4 -475000 =1325000 but here invested amout has 13,00,000 only 2) As per npv also it can be accepted; npv = 150,768 ( given) wacc=6% cash out lay =13,00,000 cost %=13,00,000*6%=%78000 the cost$78000 which is lower than the NPV of the project150768. so the project can be accepted. 3) As per IRR The IRR here is given 19% and its indicating postive signal to accept the proposal because here the WACC IS 6% HAS BEEN BELOW THE GIVEN IRR 19%.It mean the project NPV of cash inflows will be equal at 19% discount rate.So the compny have benfit of 13% discount rate,hence this project canbe accepted. 4) Since modified IRR has been advanced form the IRR method ,it is also indicating the 17% discount rate which is higher than the company's WACC 6%.

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