Solve the problem The engineering team at Manuel's Manufacturing, Inc., is planning to purchase an enterprise resourceplanning (ERP) system. The software and installation from Vendor Acost $380,000 initially and is expectedto increase revenue by $125,000 per year every year. The software and installation from Vendor B cost$280,000 and is expected to increase revenue by $95,000 per year. Manuel's uses a 4-year planning horizonand a 10 percent per year MARR.a) What is the discounted payback period of each investment? b) WhichERP system should Manuel purchase if his decision rule is to select the system with the shortest DPBP? Afirm with a 9.5 percent cost of capital is considering a project for this year's budget. The project's expectedafter-taxcash flows are as follows:Year:01Cash flow: -$9,000 $3,80023$4,2004$4,300 $4,200.Calculate the project's discounted payback period:

Question: 1Explanation of Discounted Payback Period (DPBP): The DPBP is the time it takes for the…

Answered: The engineering team at Manuel's…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 14P

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Gardner Denver Company is considering the purchase of a new piece of factory equipment that will cost $420,000 and will generate $95,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further Instructions on internal rate of return in Excel, see Appendix C.
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
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