ABC Corporation has a machine that requires repairs or should be replaced. ABC has evaluated the two options and calculated the cash flows resulting from each option as follows:
Option A: Repair the Machine Year
Cash Flow
0.........................-50,000
1..........................15,500
2..........................20,100
3..........................18,900
4..........................17,100
5..........................13,700Option B: Buy a new MachineYear Cash Flow
0..........................-400,000
1............................51,300
2...........................155,000
3...........................127,800
4...........................126,900
5...........................125,100
You have recently been hired by ABC Corporation and your first assignment is to help them decide which of these two options should be pursued. You would like to apply Capital Budgeting and Time Value of Money concepts to analyze the problem and present your recommendation to your boss, Ms. Jane Austen.
Conduct the analysis by calculating the Internal Rate of Return (IRR) and Net Present Value (NPV) for each option. The company has a Weighted Average Cost of Capital (WACC) of 12%. For this analysis, your boss asked you to calculate NPV at three different discount rates: 12% (the current WACC), 14% and 16%.
Calculation of Net Present Value at the 3 discount rates and calculation of Internal Rate of Return