Melton Manufacturing Ltd is considering two alternative investment projects. The first project calls for a major renovation of the company's manufacturing facility. The second involves replacing just a few obsolete pieces of equipment in the facility. The company will choose one project or the other this year, but it will not do both. The cash flows associated with each project appear below and the firm discounts project cash flows at 10%. Year Renovate Replace -$4,000,000 =$1,300,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 1,000,000 700,000 300,000 150,000 150,g00 2 4 5 Assignment • Calculate the payback period of each project and based on this criterion, indicate which project you would recommend for acceptance. • Calculate the net present value (NP) of each project and based on this criterion, indicate which project you would recommend for acceptance. • Calculate the internal rate of return (IRR) of each project and based on this criterion, indicate which project you would recommend for acceptance.
Melton Manufacturing Ltd is considering two alternative investment projects. The first project calls for a major renovation of the company's manufacturing facility. The second involves replacing just a few obsolete pieces of equipment in the facility. The company will choose one project or the other this year, but it will not do both. The cash flows associated with each project appear below and the firm discounts project cash flows at 10%. Year Renovate Replace -$4,000,000 =$1,300,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 1,000,000 700,000 300,000 150,000 150,g00 2 4 5 Assignment • Calculate the payback period of each project and based on this criterion, indicate which project you would recommend for acceptance. • Calculate the net present value (NP) of each project and based on this criterion, indicate which project you would recommend for acceptance. • Calculate the internal rate of return (IRR) of each project and based on this criterion, indicate which project you would recommend for acceptance.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Melton Manufacturing Ltd is considering two alternative investment projects. The first project calls for a
major renovation of the company's manufacturing facility. The second involves replacing just a few
obsolete pieces of equipment in the facility. The company will choose one project or the other this year,
but it will not do both. The cash flows associated with each project appear below and the firm discounts
project cash flows at 10%.
Year
Renovate
Replace
-$4,000,000 -$1,300,000
2,000,000
2,000,000
2,000,000
2,000,000
2,000,000
1,000,000
700,000
300,000
2
3
150,000
150,фро
4
5
Assignment
Calculate the payback period of each project and based on this criterion, indicate which project you
would recommend for acceptance.
• Calculate the net present value (NP) of each project and based on this criterion, indicate which
project you would recommend for acceptance.
• Calculate the internal rate of return (IRR) of each project and based on this criterion, indicate which
project you would recommend for acceptance.
• Calculate the profitability index (PI) of each project and based on this criterion, indicate which
project you would recommend for acceptance.
• Overall, you should find conflicting recommendations based on the various criteria. Why is this
occurring?
• Chart the NPV profiles of these projects. Label the intersection points on the x- and y-axes and the
crossover point.
• Based on this NPV profile analysis and assuming the WACC is 10%, which project would you
recommended for acceptance? Why?
• Based on this NPV profile analysis and assuming the WACC is 20%, which project is recommended?
Why?
Discuss the important elements to consider when deciding between these two projects.
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