conduct the analysis and calculate payback period for each option, IRR

QUESTION

conduct the analysis and calculate payback period for each option, IRR of each option and NPV for each option at three WACC points of 12%, 14% and 16%
Option A: Repair the machine
Year Cash flow
0 -50,000
1 15,500
2 20,100
3 18,900
4 17,100
5 13.700
Option B: Buy a new machine
Year Cash Flow
0 -400,000
1 51,300
2 155,000
3 127,800
4 126,900
5 125,100
Option A: IRR = Lower rate add NPV at lower rate/NPV at lower rate less NPV at higher rate * Difference of rates IRR = 20% add 1565/1565 less (3,566) * 5 IRR = 21.52 % Option A: Repair the machine Year Cash flow Discount factor @ 20% Discounted Amount 0 (50,000) 1 (50,000) 1 15,500 0.833 12,917 2 20,100 0.694 13,958 3 18,900 0.579 10,938 4 17,100 0.482 8,247 5 13,700 0.402 5,506 Net Present Value 1,565 Year Cash flow Discount factor @ 25% Discounted Amount 0 (50,000) 1 (50,000) 1 15,500 0.800 12,400 2 20,100 0.640 12,864 3 18,900 0.512 9,677 4 17,100 0.410 7,004 5 13,700 0.328 4,489 Net Present Value (3,566) Option B: IRR = Lower rate add NPV at lower rate/NPV at lower rate less NPV at higher rate * Difference of rates IRR = 10% add 35,105/35,105 less (19,406) * 5 IRR = 13.22 % Year Cash flow Discount factor @ 10% Discounted Amount 0 (400,000) 1 (400,000) 1 51,300 0.909 46,636 2 155,000 0.826 128,099 3 127,800 0.751 96,018 4 126,900 0.683 86,674 5 125,100 0.621 77,677 Net Present Value 35,105 Year Cash flow Discount factor @ 15% Discounted Amount 0 (400,000) 1 (400,000) 1 51,300 0.870 44,609 2 155,000 0.756 117,202 3 127,800 0.658 84,031 4 126,900 0.572 72,555 5 125,100 0.497 62,197 Net Present Value (19,406) NET PRESENT VALUE at 12%, 14%, 16% Option A: Repair the machine Year Cash flow Discount factor @ 12% Discounted Amount 0 (50,000) 1 (50,000) 1 15,500 0.893 13,839 2 20,100 0.797 16,024 3 18,900 0.712 13,453 4 17,100 0.636 10,867 5 13,700 0.567 7,774 Net Present Value

957 Option B: Buy a new machine Year Cash flow Discount factor @ 12% Discounted Amount 0 (400,000) 1 (400,000) 1 51,300 0.893 45,804 2 155,000 0.797 123,565 3 127,800 0.712 90,966 4 126,900 0.636 80,647 5 125,100 0.567 70,985 Net Present Value 11,966 Option A: Repair the machine Year Cash flow Discount factor @ 14% Discounted Amount 0 (50,000) 1 (50,000) 1 15,500 0.877 13,596 2 20,100 0.769 15,466 3 18,900 0.675 12,757 4 17,100 0.592 10,125 5 13,700 0.519 7,115 Net Present Value 9,060 Option B: Buy a new machine Year Cash flow Discount factor @ 14% Discounted Amount 0 (400,000) 1 (400,000) 1 51,300 0.877 45,000 2 155,000 0.769 119,267 3 127,800 0.675 86,261 4 126,900 0.592 75,135 5 125,100 0.519 64,973 Net Present Value (9,363) Option A: Repair the machine Year Cash flow Discount factor @ 16% Discounted Amount 0 (50,000) 1 (50,000) 1 15,500 0.862 13,362 2 20,100 0.743 14,938 3 18,900 0.641 12,108 4 17,100 0.552 9,444 5 13,700 0.476 6,523 Net Present Value 6,375 Option B: Buy a new machine Year Cash flow Discount factor @ 16% Discounted Amount 0 (400,000) 1 (400,000) 1 51,300 0.862 44,224 2 155,000 0.743 115,190 3 127,800 0.641 81,876 4 126,900 0.552 70,086 5 125,100 0.476 59,562 Net Present Value (29,062) PAYBACK PERIOD Option A: $ 35,600 is recovered in 2 years and balance $ 14,400 will be recovered in 3rd year out of cashflow of $ 18,900 2 years add 14,400/18,900 of a year 2.76 years Option A: Repair the machine Year Cash flow Cumulative Cash flow 1 15,500 15,500 2 20,100 35,600 3 18,900 54,500 4 17,100 71,600 5 13,700 85,300 Option B: $ 334,100 is recovered in 3 years and balance $ 65,900 will be recovered in 4th year out of cashflow of $ 126,900 3 years add $ 65,900/126,900 3.52 years Option B: Buy a new machine Year Cash flow Cumulative Cash flow 1 51,300 51,300 2 155,000 206,300 3 127,800 334,100 4 126,900 461,000 5 125,100 586,100

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