Dilema at Day-Pro
1.) Synthetic Resin
PP=2+250,000500,000
=2.5 yrs. Epoxy Resin
PP=1+200,000400,000
=1.5 yrs. ***Tim must explain to the board that Payback Method does not consider the cost of the capital (debt/equity) that the project will undertake which is reflected in the cash flow. It only states the length of time the company will be tied up in the project. He should also emphasize that the PBP method ignores the time value of money as well as the cash flows occuring after the payback period.
2.) Synthetic Resin
Discounted Payback=2+351,239.67375,657.40
=2.94 yrs. Epoxy Resin
Discounted Payback=1+254,545.45330,578.51
=1.77 yrs.
***Tim can asks the Board to consider DPP as a deciding factor in terms of how long will it take for the project to regain the amount invested. However, Tim must also say that it is not advisable to use it as a deciding factor in terms of ranking the projects because it ignores cash flow that are paid or received after the payback period.
3.) Synthetic Resin
ARR=Cash Flow-DepreciationInitial Investment= 500,000-200,0001,000,000
=32% ACCEPT
Epoxy Resin
ARR=Cash Flow-DepreciationInitial Investment= 340,000-160,000800,000
=22.5% REJECT
***The management will choose synthetic resin because it has a higher ARR compared to epoxy resin. But choosing this project is somewhat wrong because the ARR of synthetic resin is lower than the ARR that the management prefer. Thus, it will not satisfy the requirement of the management. Using ARR as a basis will give a quick estimate of the projects net profits and can provide a basis for comparing several different projects. However, using this method would lead to a wrong decision because the ARR method uses income data rather than cash flow and it completely ignores the time value of money.
4.) Synthetic Resin
IRR=350,0001.3663+400,000(1.3663)2+500,000(1.3663)3+650,000(1.3663)4+700,000(1.3663)5-1,000,000= 36.63%
Epoxy Resin
PP=2+250,000500,000
=2.5 yrs. Epoxy Resin
PP=1+200,000400,000
=1.5 yrs. ***Tim must explain to the board that Payback Method does not consider the cost of the capital (debt/equity) that the project will undertake which is reflected in the cash flow. It only states the length of time the company will be tied up in the project. He should also emphasize that the PBP method ignores the time value of money as well as the cash flows occuring after the payback period.
2.) Synthetic Resin
Discounted Payback=2+351,239.67375,657.40
=2.94 yrs. Epoxy Resin
Discounted Payback=1+254,545.45330,578.51
=1.77 yrs.
***Tim can asks the Board to consider DPP as a deciding factor in terms of how long will it take for the project to regain the amount invested. However, Tim must also say that it is not advisable to use it as a deciding factor in terms of ranking the projects because it ignores cash flow that are paid or received after the payback period.
3.) Synthetic Resin
ARR=Cash Flow-DepreciationInitial Investment= 500,000-200,0001,000,000
=32% ACCEPT
Epoxy Resin
ARR=Cash Flow-DepreciationInitial Investment= 340,000-160,000800,000
=22.5% REJECT
***The management will choose synthetic resin because it has a higher ARR compared to epoxy resin. But choosing this project is somewhat wrong because the ARR of synthetic resin is lower than the ARR that the management prefer. Thus, it will not satisfy the requirement of the management. Using ARR as a basis will give a quick estimate of the projects net profits and can provide a basis for comparing several different projects. However, using this method would lead to a wrong decision because the ARR method uses income data rather than cash flow and it completely ignores the time value of money.
4.) Synthetic Resin
IRR=350,0001.3663+400,000(1.3663)2+500,000(1.3663)3+650,000(1.3663)4+700,000(1.3663)5-1,000,000= 36.63%
Epoxy Resin