Use excel pleasor any spreadsheets, NOTE HAND WRITTEN PLEASE Case Analysis 2 (we
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Use excel pleasor any spreadsheets, NOTE HAND WRITTEN PLEASE
Case Analysis 2 (weight 30% of Total Assignment) The CEO of Dynamic Manufacturing was at a conference and talked to a supplier about a new piece of equipment for its production process that she believes will produce ongoing cost savings. As the Operations Manager, your CEO has asked for your perspective on whether or not to purchase the machinery. After talking to the supplier and meeting with your Engineers and Financial Analysts, you've gathered the following pieces of data Cost of Machine: $153,000 Estimated Annual After Tax Cash Flow Savings: $62,000 (which may or may not grow) Estimated machinery life: 3-5 years (after which there will be zero value for the equipment and no further cost savings) You seem to recall that Dynamics Finance organization recommends either a 10% or a 15% discount rate for all Cost Savings Projects From your JWMI MBA, you know that you need to understand the project financials to ensure that this investment will be economically attractive to Dynamic Manufacturing's shareholders Calculate the Nominal Payback, the Discounted Payback, the Net Present Value and the IRR for each scenario assuming: A. Alice (A) recommends using the base assumptions above: 3 year project life, flat annual savings, 10% discount rate Bill (B) recommends savings that grow each year. 3 year project life, 10% discount rate and a 10% compounded annual savings growth in years 2 & 3. In other words, instead of assuming savings stay flat, assume that they will grow by 10% in year 2, and then grow another 10% over year 3 in year Carla (C) believes we use a higher Discount Rate because of the risk of this type of project: 3 year project life, flat annual savings, 15% discount rate Danny (D) is convinced the machine will last longer than 3 years. He recommends using a 5 Year Equipment Life: 5 year project and savings life, flat annual savings, 10% discount rate. In other words, assume that the machine will last 2 more years and deliver 2 more years of savings B. C. D.Explanation / Answer
Case 1
Nominal Payback
Year
Cash Flow
Cumulative Cashflow
Discount Rate @ 10%
Discounted Cash flows
Discounted Cumulative Cash flows
0
-153000
-153000
1.0000
-153000.00
-153000.00
1
62000
-91000
0.9090
56358.00
-96642.00
2
62000
-29000
0.8264
51236.80
-45405.20
3
62000
33000
0.7513
46580.60
1175.40
NPV
1175.40
Normal Payback
=2 + (29000/62000)
2.4677 Year
Discounted Payback
=2+(-45405.20/46580.60)
2.9747 Year
IRR is the discounting rate which will result in NPV zero. Here NPV is 1175.40 when discounting rate is 10%.
Using trial and error we get, IRR as
IRR
10.44%
Case 2
Nominal Payback
Year
Cash Flow
Cumulative Cashflow
Discount Rate @ 10%
Discounted Cash flows
Discounted Cumulative Cash flows
0
-153000
-153000
1.0000
-153000.00
-153000.00
1
62000
-91000
0.9091
56363.64
-96636.36
2
68200
-22800
0.8264
56363.64
-40272.73
3
75020
52220
0.7513
56363.64
16090.91
NPV
16090.91
Normal Payback
=2 + (22800/75020)
2.3039
Year
Discounted Payback
=2+(40272.73/56363.64)
2.7145
Year
IRR is the discounting rate which will result in NPV zero. Here NPV is 16090.91 when discounting rate is 10%.
Using trial and error we get, IRR as
IRR
15.70%
Case 3
Nominal Payback
Year
Cash Flow
Cumulative Cashflow
Discount Rate @ 15%
Discounted Cash flows
Discounted Cumulative Cash flows
0
-153000
-153000
1.0000
-153000.00
-153000.00
1
62000
-91000
0.8696
53913.04
-99086.96
2
62000
-29000
0.7561
46880.91
-52206.05
3
62000
33000
0.6575
40766.01
-11440.04
NPV
-11440.04
Normal Payback
=2 + (29000/62000)
2.4677
Year
Discounted Payback
= Here NPV is negative which shows, project will not generate enough cash which is equal to
Initial investment. Hence there is no discounted payback in the given period of 3 years.
IRR is the discounting rate which will result in NPV zero. Here NPV is -11440.04 when discounting rate is 15%.
Using trial and error we get, IRR as
IRR
10.44%
Case 4
Nominal Payback
Year
Cash Flow
Cumulative Cashflow
Discount Rate @ 10%
Discounted Cash flows
Discounted Cumulative Cash flows
0
-153000
-153000
1.0000
-153000.00
-153000.00
1
62000
-91000
0.9091
56363.64
-96636.36
2
62000
-29000
0.8264
51239.67
-45396.69
3
62000
33000
0.7513
46581.52
1184.82
4
62000
95000
0.6830
42346.83
43531.66
5
62000
157000
0.6209
38497.12
82028.78
NPV
82028.78
Normal Payback
=2 + (29000/62000)
2.4677
Year
Discounted Payback
=2 + (45396.69/46581.52)
2.9746
Year
IRR is the discounting rate which will result in NPV zero. Here NPV is 82028.78 when discounting rate is 10%.
Using trial and error we get, IRR as
IRR
29.30%
Case 1
Nominal Payback
Year
Cash Flow
Cumulative Cashflow
Discount Rate @ 10%
Discounted Cash flows
Discounted Cumulative Cash flows
0
-153000
-153000
1.0000
-153000.00
-153000.00
1
62000
-91000
0.9090
56358.00
-96642.00
2
62000
-29000
0.8264
51236.80
-45405.20
3
62000
33000
0.7513
46580.60
1175.40
NPV
1175.40
Normal Payback
=2 + (29000/62000)
2.4677 Year
Discounted Payback
=2+(-45405.20/46580.60)
2.9747 Year
IRR is the discounting rate which will result in NPV zero. Here NPV is 1175.40 when discounting rate is 10%.
Using trial and error we get, IRR as
IRR
10.44%
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