Executive summary

Topics: Net present value, Internal rate of return, Investment Pages: 1 (431 words) Published: October 28, 2014
Paccar, a local truck manufacturer, is considering upgrading the technological capabilities of their two major lines of trucks PeterBilt and Kenworth. The decision whether to invest in this new technology is complicated by the realization that Paccar could buy the technology for an outside firm or could attempt to develop the technology in house. I apply four traditional performance measures (NPV, IRR, MIRR and Payback period) to decide whether to buy or build the technology. First of all, I use the given data to make the assumptions for both buy and build analysis. Next, I use the assumptions to calculate the after-tax cash flow. Last but not the least, I have the after-tax cash flow and I use excel to calculate the NPV, IRR, MIRR, and Payback period. From NPV perspective, both buying and building the technology are acceptable because these two projects NPV is positive. Building the technology is better than buying because NPV of building is greater than NPV of buying (21.13 VS 16.76). For IRR method, both buying and building the technology are acceptable too because these two projects IRR is greater than the WACC (8). Building the technology (IRR12.53) is better than buying the technology (IRR11.17). Comparing with Payback Period, building the technology takes 3.83 years to recover the initial outlay while buying the technology takes 3.96 years. Because building takes less time to recover the initial outlay, building is better. I also apply the modified internal rate of return (MIRR) to this analysis. The modified internal rate of return is an alternative measure of the annual rate of return on an investment that assumes you reinvest the cash flows at the required rate of return. MIRR is value neutral regarding the reinvested cash flows and is not incorporating any spurious value enhancing/destroying activity. According to MIRR approach, building the technology dominates buying the technology (10.83 VS 9.99). Based on my financial analysis, building the...
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