Reference no: EM132516201
Question: A firm wants to buy a computerized lathe in 2020. There are two candidates. The first lathe (Project A) is a Chinese made lathe whose price is $ 4 000 000. The second candidate is a German made lathe whose price is $ 6 000 000. The firms wants to choose one of them and uses both discounted payback method and Net PV method for evaluation. Both machines have an equal lifetime of 5 years and firm uses a discount rate 15% in both methods (in discounted payback method and net PV method).
The expected cash flows of Chinese lathe (Project A) are as follows (cost of investment is paid in 2020)
2021 $ 2 000 000
2022 $ 2 500 000
2023 $ 3 000 000
2024 $ 3 000 000
2025 $ 2 000 000
The firm expects to sell Chinese lathe at the end of 2025 for a value of $ 700 000 (salvage value is $ 700 000)
The expected cash flows of German lathe (Project B) are as follows (cost of investment is paid in 2020)
2021 $ 2 500 000
2022 $ 3 000 000
2023 $ 3 200 000
2024 $ 4 000 000
2025 $ 4 700 000
The firm expects to sell the German lathe by the end of 2025 for a value of $ 3 500 000 (salvage value is $ 3 500 000).
- What is exact payback period of Chinese lathe
-If the firm's desired payback period is 3 years; is the Chinese lathe an acceptable investment.
-What is the exact payback period of German lathe
-Is German lathe an acceptable investment if desired payback period is 3 years?
-Which lathe is a better investment according to Discounted Payback Method
-What is the Net PV of the Chinese lathe?
-Is Chinese lathe an acceptable investment according to Net PV?
-What is the Net PV of German lathe?
-Is German lathe an acceptable investment according to Net PV method?
-Which lathe is a better investment according to Net PV method?
- Given all these evaluations above; what is your final decision? Will you buy Chinese or German lathe?