Assignment Description:
ABC Corporation has a machine that requires repairs or should be replaced. ABC has evaluated the two options and calculated the cash flows resulting from each option as follows:
Option A: Repair the Machine YearCash Flow0-50,000131,500220,100318,900417,100513,700
Option B: Buy a new Machine
YearCash Flow0-400,000191,3002155,0003127,8004126,9005125,100
You have recently been hired by ABC Corporation and your first assignment is to help them decide which of these two options should be pursued. You would like to apply Capital Budgeting and Time Value of Money concepts you have learnt in FIN 301 to analyze the problem and present your recommendation to your boss, Ms. Jane Austen.
Conduct the analysis by calculating the following for each option:
1. Net Present Value (NPV) 2. Internal Rate of Return (IRR) 3. Profitability Index (PI) 4. Payback Period (PB) 5. Crossover Rate
The company has a Weighted Average Cost of Capital (WACC) (discount Rate) of 12%. For this analysis, your boss John Doe asked you to calculate NPV at three different discount rates: 12% (the current WACC), 14% and 16%.
Write a memo explaining your decision