Reference no: EM132538153

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