Croda Corp. needs a new gizmo for production of its 2003-2004 models. You have b

Question

Croda Corp. needs a new gizmo for production of its 2003-2004 models. You have been appointed to do capital budgeting analysis. You have identified two different machines that are capable of performing the job. You have completed the cash flow analyis, and the expected net cash flows are as follows:

Year

0

1

2

3

4

Gizmo 1

(5,000)

2,085

2,085

2,085

2,085

Gizmo 2

($5,000)

0

0

0

9,677

1.) What is payback period for Machine B?

a.) 2.4 years

b.) 3.0 years

c.) 2.6 years

d.) 2.0 years

e.) 1 year

2.) If the cost of capital for the project is 14 percetny at the time the decision is made, which machine would you choose?

a.) Gizmo 1; it has the higher positive NPV

b) Either; both have the same NPV.

c.) Gizmo 1; it has the higher IRR

d.) Gizmo 2; it has the higher positive NPV

e.) Niether; both have negative NPVs

PLEASE SHOW WORK. NO PICTURES!

Explanation / Answer

1. 5000=2085+2085+0.4*2085

2.4 years

2.a.) NPV for Gizmo 1 = -5000+2085*(1-1.14^-4)/0.14 = 1075.09

NPV for Gizmo 2 = -5000+9677/1.14^4 = 729.56

; Gizmo 1 it has the higher positive NPV

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