Hanson Mechatronics is considering replacement of its computerized vertical bori

Question

Hanson Mechatronics is considering replacement of its computerized vertical boring mills. Three alternative replacement machines are under consideration. The relevant cash flows associated with each are the additional after-tax cash flows projected to occur due to increased productivity and reduced waste from errors. They are shown in the following table.

WACC is 8%

Initial Capital Expenditures

Compute payback (be sure to calculate partial final year), IRR to the tenths place, and NPV to the nearest dollar, for each option.

Which machine or machines would you accept?

Now imagine that instead of three computerized milling machines, problem #1 changes as follows: Project A is for a robotic system, Project B is the construction of an additional warehouse in a region that currently doesn’t have one.Project C is the proposal to add an in-house training department. State which project/s you would accept and defend your answer.

Initial Capital Expenditures $85,000 $160,000 $102,000 Year Machine A Machine B Machine C 1 28,200 32,000 50,000 2 27,200 24,000 30,000 3 17,800 37,000 33,500 4 25,280 38,000 10,000 5 10,000 21,000 10,000 6 14,800 23,000 8,900

Explanation / Answer

Particulars Year Cash Flows Cum Cash Flows PVF @ 8% PV PVF @ 15% PV Initial Cost 0 -85000 -85000 1 -85000 1 -85000 Cash Inflows 1 28200 -56800 0.925926 26111.11 0.86956522 24521.74 Cash Inflows 2 27200 -29600 0.857339 23319.62 0.75614367 20567.11 Cash Inflows 3 17800 -11800 0.793832 14130.21 0.65751623 11703.79 Cash Inflows 4 25280 13480 0.73503 18581.55 0.57175325 14453.92 Cash Inflows 5 10000 23480 0.680583 6805.832 0.49717674 4971.767 Cash Inflows 6 14800 38280 0.63017 9326.51 0.4323276 6398.448 NPV 13274.84 -2383.23 Payback Period = 3 years+ 11800/25280 i.e 3.466 years IRR = 8% + 5.93 i.e 13.93% Particulars Year Cash Flows Cum Cash Flows PVF @ 8% PV PVF @ 1% PV Initial Cost 0 -160000 -160000 1 -160000 1 -160000 Cash Inflows 1 32000 -128000 0.925926 29629.63 0.99009901 31683.17 Cash Inflows 2 24000 -104000 0.857339 20576.13 0.98029605 23527.11 Cash Inflows 3 37000 -67000 0.793832 29371.79 0.97059015 35911.84 Cash Inflows 4 38000 -29000 0.73503 27931.13 0.96098034 36517.25 Cash Inflows 5 21000 -8000 0.680583 14292.25 0.95146569 19980.78 Cash Inflows 6 23000 15000 0.63017 14493.9 0.94204524 21667.04 NPV -23705.2 9287.182 Payback Period = 5 years + 8000/23000 i.e 5.34 years IRR = 1% + 1.97% i.e 2.97% Particulars Year Cash Flows Cum Cash Flows PVF @ 8% PV PVF @ 30% PV Initial Cost 0 -102000 -102000 1 -102000 1 -102000 Cash Inflows 1 50000 -52000 0.925926 46296.3 0.76923077 38461.54 Cash Inflows 2 30000 -22000 0.857339 25720.16 0.59171598 17751.48 Cash Inflows 3 33500 11500 0.793832 26593.38 0.45516614 15248.07 Cash Inflows 4 10000 21500 0.73503 7350.299 0.3501278 3501.278 Cash Inflows 5 10000 31500 0.680583 6805.832 0.26932907 2693.291 Cash Inflows 6 89000 120500 0.63017 56085.1 0.20717621 18438.68 NPV 66851.07 -5905.67 Payback Period = 2 years + 22000/33500 i.e 2.66 years IRR = 8% +20.21 % i.e 28.21%

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