Assignment Task:
Assignment Details: In this case study, your group assumes the role of a financial advisor to a firm. As a financial advisor, you are required to prepare an executive-style report, in a manner consistent with what is expected in the real world by a typical Board of Directors.
1. Report title page:
a. This is a distinctive title page prepared by your team with their names and students members as well.
2. Executive summary (maximum 1000 words):
a. Write an executive summary to the CEO and the board supported by your capital budgeting analysis from previous step. The executive summary should cover:
i. Definition of the problem
ii. Objectives
iii. Methods (write at least three references when you define and explain the methods, make references list at the end using any referencing style)
iv. Key findings
v. Conclusions
vi. Recommendations
3. Other factors should the firm consider (maximum 200 words):
a. Here you should be able to specify any further factors the company might overlooked or other factors that should have been taken into consideration.
Case study - Making Doors plus Firm Investment Decision
Doors Plus is a large carpentering firm considering replacing one of its sawing machine with either of two sawing machines, machine A or machine B. Machine A is highly automated, computer-controlled machine; machine B is a less expensive machine that uses standard technology. To analyze these alternatives, David Ray, a financial analyst, prepared estimates of the initial investment and incremental (relevant) after-tax net cash flows associated with each machine. These are showing in the following table:
|
Machine A Machine B
|
|
Initial investment Year
|
$660,000
|
Net cash inflows
|
$360,000
|
|
1
|
$128,000
|
|
$88,000
|
|
2
|
182,000
|
|
120,000
|
|
3
|
166,000
|
|
96,000
|
|
4
|
168,000
|
|
86,000
|
|
5
|
450,000
|
|
207,000
|
Note that David plans to mortise both machines over five-year period. At the end of that time, the machine would be sold, thus accounting for the large fifth-yeah net cash flows.
David believes that the two machines are equally risky and that acceptance of either of them will not change firm's overall risk. He therefore decides to apply the firm's 13% cost of capital when evaluating the machines. Doors Plus carpentering requires all projects to have a maximum payback of four years.
Required:
1. Using the payback period to assess the acceptability and relative of each machine.
2. Assuming equal risk, use the following capital budgeting techniques to assess the acceptability and relative ranking of each machine:
a. Net present value.
b. Internal rate of return (IRR)
3. Summaries the preferences indicated by techniques used in question 1 and 2. Does the project have conflicting ranking?
4. Use your finding in question 1 to 3 to indicate on a theoretical and practical basis which machine would be preferred. Explain and differences in your recommendation.
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