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 the capital budgeting and Time Value Money concepts you have learnt in FIN 301 to analyze the soltion and present it to your boss in three days.
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
Year Cash Flow
0 -51,000
1 17,400
2 21,100
3 18,700
4 18,100
5 12,300
Option B: Buy a new Machine
Year Cash Flow
0 -410,000
1 52,300
2 165,000
3 108,800
4 125,300
5 124,900
Conduct the analysis and calculate
1 payback
2 IRR
3 NPV
4 PI
for each option at three WACC points of:
10%
12%
15%
Finally, plot NPV profile charts for both Option A and B on a single graph for comparison