The Case Study Making Ford Firm Investment Decision Ford is a large cars makers firm considering...
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The Case Study Making Ford Firm Investment Decision Ford is a large cars makers firm considering replacing one of its painting machine with either of two new machines, machine A or machine B. Machine A is highly automated, computer- controlled machine; machine B is a less expensive machine that uses standard technology. To analyse these alternatives, Simon Ray, a financial analyst, prepared estimates of the initial investment and incremental (relevant) after-tax net cash flows associated with each machine. These are showing in the following table: Initial investment Machine A $660,000 Machine B $360,000 Year Net cash inflows 1 $128,000 $88,000 2 182,000 120,000 345 166,000 96,000 168,000 86,000 450,000 207,000 Note that Simon plans to mortise both machine over a five-year period. At the end of that time, the machines would be sold, thus accounting for the large fifth-year net cash flows. Simon believes that the both machines are equally risky and that acceptance of either of them will not change firm's overall risk. He therefore decides to apply the firm's 13% cost of capital when evaluating the machines. The firm requires all projects to have a maximum payback period of four years. The Case Study Making Ford Firm Investment Decision Ford is a large cars makers firm considering replacing one of its painting machine with either of two new machines, machine A or machine B. Machine A is highly automated, computer- controlled machine; machine B is a less expensive machine that uses standard technology. To analyse these alternatives, Simon Ray, a financial analyst, prepared estimates of the initial investment and incremental (relevant) after-tax net cash flows associated with each machine. These are showing in the following table: Initial investment Machine A $660,000 Machine B $360,000 Year Net cash inflows 1 $128,000 $88,000 2 182,000 120,000 345 166,000 96,000 168,000 86,000 450,000 207,000 Note that Simon plans to mortise both machine over a five-year period. At the end of that time, the machines would be sold, thus accounting for the large fifth-year net cash flows. Simon believes that the both machines are equally risky and that acceptance of either of them will not change firm's overall risk. He therefore decides to apply the firm's 13% cost of capital when evaluating the machines. The firm requires all projects to have a maximum payback period of four years.
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