Payback period and irr, Financial Management

Assignment Help:

To look into the feasibility of a new production system, K-Pad, the largest P.C. producer in the region, has spent $88,000 on the technical feasibility study. In view of the favorable comment of the study, K-Pad is considering replacing one of its production system with either of two new production systems - system A or system B. System A is a highly automated, computer-controlled system that uses cutting edge technology; system B is a less expensive system that uses standard technology. To analyze these alternatives, Janice Yan, a financial analyst, prepared estimates of the initial investment and cash inflows associated with each system. These are shown in the following table.


System A

System B

Initial investment

$660,000

$360,000

Year

Cash inflows

1

$128,000

$88,000

2

$182,000

$120,000

3

$166,000

$96,000

4

$168,000

$86,000

5

$450,000

$207,000

Note that Janice plans to analyze both systems over a 5-year period. At the end of that time, the systems would be sold, thus accounting for the large fifth-year cash inflows. Janice believes that the two systems are equally risky and that the acceptance of either of them will not change the firm's overall risk. She therefore decides to apply the firm's 13% cost of capital when analyzing the systems. K-Pad requires all projects to have a maximum payback period of 4.0 years.

Required:

(a) Use the payback period to determine which system should be chosen.               

(b) Use both NPV and IRR to rank each system.                                                                

(c) Summarize the preferences indicated by the techniques used in parts (a) and (b). Which system should be chosen? Why?                                                                                      

(d) Draw the net present value profiles for both systems on the same set of axes, and discuss any conflict in rankings that may exist between NPV and IRR. Explain any observed conflict in terms of the relative differences in the magnitude and timing of each system's cash flows

(e) Use your findings in parts (a) through (b) to indicate, on both a theoretical basis and a practical basis, which system would be preferred. Explain any difference in recommendations.


Related Discussions:- Payback period and irr

Determine the concept of measuring the rate of return, Determine the concep...

Determine the concept of Measuring the Rate of Return The rate of return is total return the investor receives during holding period (the period when security is owned or held

Define stress testing and leverage, Lehman Brothers Holdings was a global f...

Lehman Brothers Holdings was a global financial services firm which, until declaring bankruptcy in 2008, participated in business in investment banking, equity and fixedincome sale

Healthcare Finance, I am trying to make a payment and I can''t seem to get ...

I am trying to make a payment and I can''t seem to get it to go throught on you all site..

Define the advantages of collecting early, What are the advantages of “coll...

What are the advantages of “collecting early” and how do companies attempt to do this? Money has time value.  The sooner cash is collected, the better.  Companies employ regional

Determine about the strategic benchmarking, Determine about the Strategic B...

Determine about the Strategic Benchmarking Comparison in terms of an organisations 'strategic choices' made to the most successful market leader for example review organisat

Determination of values price and volume, Determination of values The v...

Determination of values The values for which NPV turns into zero are found by calculating the break-even values for the selected variables. Once determined these give an indica

Calculate the net premium retrospective reserve value, Question: On 1st...

Question: On 1st October 2001 a man then aged 34 took out an endowment assurance policy with a sum assured of $100,000 payable on survival to age 50 or at the end of the year o

Proposed pollution control project -memorandum, Memorandum Memo to: Bla...

Memorandum Memo to: Blackwater plc Main Board. Subject: Proposed Pollution Control Project. From: Lower down the hierarchy. Date: That'll be the day. On purely non-

Marginal weighting system, uses and limitations of the marginal weighting s...

uses and limitations of the marginal weighting system

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd