Finance issue with NPV, IRR, Payback.
I know this has been visited in the past, I tried to search for it but can someone help me out? The following information is available:
Revenues will not change if the machine is replaced.
Both the present machine and the new machine will last 5 years and will have no disposal value in five years.
The new machine will cost $1,000,000. The old machine can be disposed of right now for a disposal value of $30,000.
The new machine will reduce operating costs by $300,000 per year (assume cash flows at the end of the years.)
Assume a required rate of return or discount rate of 10%
Part 1: Determine if the new machine should be purchased. Use NPV, IRR, and Payback in your analysis where appropriate. Refer to the articles below and the background materials in your analysis.
Part 2: What method (NPV or others) is the best method to use for capital budgeting purposes. Defend your arguments carefully, and take into account the following among other concers:
a) ease of use
b) quality of information from such method
c) quantity of information from such method
Answer Part 1 and Part 2 for a total of six pages.
Thanks in advance.
