Problem:
On Your Mark is considering purchasing new manufacturing equipment that costs $1,300,000 and is expected to improve cash flows by $500,000 in year 1, $350,000 in year 2, $475,000 in year 3, $450,000 in year 4, and $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 five years are required for the project. These key metrics must include (1) payback period, (2) net present value, and (3) internal rate of return. (Use 6% as the weighted average cost of capital).
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 whether to accept or reject the project.