Reference no: EM132532038
The Case Study
Making Ford Firm Investment Decision
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 table:
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.
Required to be reported in your single report:
In this case study, assumes yourself as a financial manager advisor to Ford firm. A financial advisor role is required to write an executive-style report, in a manner consistent with what is expected in the real world by a typical Board of Directors. The report need to consists of the following questions:
1- Show the project's evaluation steps and results as follow:
- 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.
2- Summaries the results that are indicated by all the three techniques used above.
3- Use your facts in key finding to indicate on a theoretical and practical basis which machine would be preferred? Explain why?
4- What other factors should the firm consider? Specify any further factors the firm might overlooked or other factors that should have been taken into consideration while valuation.
5- Which, if either, of the projects the firm should acquire if the firm has:
1. Unlimited funds.
2. Capital rationing.
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