Financial Decision Making: Class: Financial Managerial

On Your Mark is considering purchasing new manufacturing equipment that costs $1,300,000 and is expected to improve cash flows by $500,000 in year 1, $350,000 in year 2, $475,000 in year 3, $450,000 in year 4, and $300,000 in year 5.

Key financial metrics for this capital budgeting project have been calculated and provided by the Finance department (see below). A 14% rate of return and a payback period of less than five years are required for the project. These key metrics must include (1) payback period, (2) net present value, and (3) internal rate of return. (Use 6% as the weighted average cost of capital).

Year 0
Year 1
Year 2
Year 3
Year 4
Year 5

(1,300,000)
500,000
350,000
475,000
450,000
300,000

pv

438,596
269,314
320,611
266,436
155,811

NPV

150,768

IRR

19%

payback

800,000
450,000
(25,000)
(475,000)
(775,000)

MIRR

17%

In a memo to the CFO, discuss the metrics and make a recommendation whether to accept or reject the project.

Choose one metric to begin with (payback, for example). State the pros & cons, the decision (accept/reject) criteria, and whether or not you would accept the project and why (support this with the figures provided). Then, move on to the next metric (NPV, for example) and do the same thing, for all three metrics.

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...e cash inflow for two more years that is for 5 years. Therefore, definitely the purchase of machine is profitable. However, payback method does not take into account the time value of the money. Therefore, Net Present value (NPV) can be considered for the determination of purchase of the equipment

Net Present value:
The difference between the present value of cash inflows and the present value of cash outflows. NPV is used to analyze the profitability of an investment or project.

Here , taking the weighted average cost of capital is ...