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 0 –$4,000,000 –$1,300,000 1 2,000,000 1,000,000 2 2,000,000 700,000 3 2,000,000 300,000 4 2,000,000 150,000 5 2,000,000 150,000 Based on this NPV profile analysis and assuming the WACC is 10%, which project would you recommended for acceptance? Why?
Studentsarerequiredtoworkina groupof 4 -5 studentsandmustregisterfortheirgroupwiththelecturerin week
4 and 5 and are not allowed to change group members without the lecturer’s permission. Students need to
analyse the following calculation based business scenario and present the finding in a form of business report;
methods of calculations need to be presented. Note: Refer to ALS guideline on preparing a business report.
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
0 –$4,000,000 –$1,300,000
1 2,000,000 1,000,000
2 2,000,000 700,000
3 2,000,000 300,000
4 2,000,000 150,000
5 2,000,000 150,000
Based on this
recommended for acceptance? Why?
NPV profile is a graphical representation of the NPVs of different projects at different discount rate. Crossover rate is the rate at which th NPV of both options/project would be the same. At a rate lower than crossover rate, one project is favorable and at a rate higher than the crossover rate another.
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