Reference no: EM132526007

Ford is a large cars makers firm considering replacing one of its painting machine with either of two new machines, machine A or machine B. Machine A is highly automated, computer- controlled machine; machine B is a less expensive machine that uses standard technology. To analyse these alternatives, Simon Ray, a financial analyst, prepared estimates of the initial investment and incremental (relevant) after-tax net cash flows associated with each machine.

These are showing in the following

Machine A

Initial investment Year: $660,000

Net cash flows:

Year 1: $128,000;

Y2: 182,000;

Y3: 166,000;

Y4: 168,000;

Y5: 450,000

Machine B

Initial investment Year: $360,000

Y1: $88,000;

Y2: 120,000;

Y3: 96,000;

Y4: 86,000;

Y5: 207,000

Note that Simon plans to mortise both machine over a five-year period. At the end of that time, the machines would be sold, thus accounting for the large fifth-year net cash flows.

• Simon believes that the both machines are equally risky and that acceptance of either of them will not change firm's overall risk. He therefore decides to apply the firm's 13% cost of capital when evaluating the machines. The firm requires all projects to have a maximum payback period of four years.

Question 1: Use the payback period to assess the acceptability and relative rank of each machine. - Assuming equal risk, use Net present value (NPV) and Internal rate of return (IRR) techniques to assess the acceptability and relative ranking of each machine