Topics: Net present value, Cash flow, Internal rate of return Pages: 1 (318 words) Published: February 2, 2013
Flowton product enjoys a steady demand for stainless steel infiltrators used in anumber of chemical processes. Revenues from the infiltrator division are $50million a year and production cost are $47.50. However, the high-precisionMunster stamping machines that are used in the production process are coming tothe end of their useful life. One possibility is simply to replace each existingmachine with a new Munster. These machines would cost $800000 each and wouldnot involve any addition operating costs. The alternative is to buy 10 centrallycontrolled skilboro stampers. Skilboro cost $1.5 million each, but compare to theMunster, they would produce a total saving in operator and material cost of $500000 a year. More over the skilboro is sturdily built and would last year,compared with an estimated 7-year life for the Munster Analysts in the infiltrator division have produced the accompanying summarytable, which show the forecast total cash flows from the infiltrator business over the life of each machine. Flowstone¶s standard producers for appraising capitalinvestments involve calculating net present value, internal rate of return, and payback and these measures are also shown in table.As usual, Emily balsam arrived early at flowstone¶s head office. She had never regretted joining flowstone. Everything about the place, from the mirror windowsto the bell fountain in the atrium suggested a classy outfit. Ms. Balsam sighedhappily and reached for the envelope at the top of her in-tray. It was analysis fromthe infiltrator division of replacement options for the stamper machines. Pinned tothe paper was summary table of cash flows and note from the CFO, which read,³Emily, I have read through 20 pages of excruciating detail and I still don¶t knowwhich of these machines we should buy. The NPV calculation seems to indicatethat the Skilboro is best, while IRR and payback suggest the opposite. Would youtake a look and tell me what we should do and why.
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