FIN 301 – Principles of Finance Excel and Writing Assignment Assignment Description: ABC Corporation has a machine that requires repairs or should be replaced. ABC has evaluated the two options and...

Principles of Finance
We have two projects – Option A – Repair the Machine and Option B – Buy a New Machine. The cash flow from both the projects for next 5 years are shown as follows.
    OPTION A: REPAIR THE MACHINE
    0
    1
    2
    3
    4
    5
     (50,000)
    31,500
    20,100
    18,900
     17,100
    13,700
    OPTION B: BUY A NEW MACHINE
    0
    1
    2
    3
    4
    5
    (4,00,000)
    91,300
    1,55,000
    1,27,800
     1,26,900
    1,25,100
Internal Rate of Return and Profitability Index
For both the option we have computed Internal Rate of Return (IRR) and Profitability Index (PI). The IRR of Option A is 35.32% which is higher than the Option B. Also, the profitability for Option A i.e. repairing the machine is higher as the initial investment is less and cash flows are still decent.
     
    Option A
    Option B
    Internal Rate of Return (IRR)
    35.32%
    16.56%
    Profitability Index (PI)
    52.48%
    11.92%
Three Scenarios – NPV and Payback period Calculation
Case 1
    WACC
    12%
    
    
    
    
     
    Option A
    Option B
    Net Present Value (NPV)
    26,242.35
    47,680.77
    Payback Period (PB) (Discounted) - Option A
     
    0
    1
    2
    3
    4
    5
    Cash Flows
     (50,000)
     31,500
     20,100
     18,900
     17,100
     13,700
    Discounted Cash Flows
     (50,000)
     28,125
     16,024
     13,453
     10,867
     7,774
    Cumulative Cash Flows
     (50,000)
     (21,875)
     (5,851)
     7,601
    
    
    
    
    
    
    
    
    
    Payback Period
     2.43
    
    
    
    
    
    Payback Period (PB) (Discounted) - Option B
     
    0
    1
    2
    3
    4
    5
    
     (4,00,000)
     91,300
     1,55,000
     1,27,800
     1,26,900
     1,25,100
    Discounted Cash Flows
     ...