ABC Corporation has a machine that requires repairs or should be replaced.ABC has evaluated the two options and calculated the cash flows resultingfrom each option as follows:
Option A: Repair the Machine
|
Year
|
Cash Flow
|
|
0
|
-50,000
|
|
1
|
15,500
|
|
2
|
20,100
|
|
3
|
18,900
|
|
4
|
17,100
|
|
5
|
13,700
|
Option B: Buy a new Machine
|
Year
|
Cash Flow
|
|
0
|
-400,000
|
|
1
|
51,300
|
|
2
|
155,000
|
|
3
|
127,800
|
|
4
|
126,900
|
|
5
|
125,100
|
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 to analyze the problem and present your recommendation to your boss, Ms. Jane Austen.
Conduct the analysis by calculating the following:
1. Payback Period
2. Discounted Payback Period
3. Net Present Value (NPV)
4. Internal Rate of Return (IRR)
5. Modified Internal Rate of Return MIRR
6. Profitability Index (PI)
7. Calculate and graph the NPV profile for both options
8. Calculate cross-over rate if there is one
The company has a Weighted Average Cost of Capital (WACC) of 12%. For this analysis, your boss asked you to conduct a sensitivity analysis by calculating NPV at three different discount rates: 12% (the current WACC), 14% and 16%.