Task: Croda Corp. requires a new gizmo for manufacture of its 2003-2004 models. You have been appointed to do capital budgeting analysis. You have identified two dissimilar machines which are able of performing the job. You have finished the cash flow analysis, and the expected net cash flows are as follows:
Year Gizmo 1 Gizmo 2
0 (5,000) ($5,000)
1 2,085 0
2 2,085 0
3 2,085 0
4 2,085 9,677
1.) What is payback period for Machine B?
a.) 2.4 years
b.) 3.0 years
c.) 2.6 years
d.) 2.0 years
e.) 1 year
2.) If the cost of capital for the project is 14 percents at the time the decision is made, which machine would you select?
a.) Gizmo 1; it has the higher positive NPV
b) Either; both have the same NPV.
c.) Gizmo 1; it has the higher IRR
d.) Gizmo 2; it has the higher positive NPV
e.) Neither; both have negative NPVs