Norwich Tool case solution


CASE: MAKING NORWICH TOOLS LATHE
INVESTMENT DECISIONS
PAR T A:
PAYBACK PERIOD

years

cash flows 0
1
2
3
4
5

(660,000)
128,000
182,000
166,000
168,000
450,000
PBPA

LATHE A cumulative cash flows cash flows LATHE B cumulative cash flows 128,000
310,000
476,000
644,000
1,094,000

(360,000)
88,000
120,000
96,000
86,000
207,000

88,000
208,000
304,000
390,000
597,000

4.04

PBPB

3.65

ACCEPTABILTY OF EACH PROJECT:
Lathe A will be rejected because it¶s payback period is longer than 4 years maximum expected payback period
4.04years > 4years
Lathe B project is accepted because it payback period is less than the 4 year maximum payback period 3.65years < 4 years

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PART B:
NPV &IRR

LATHE A NPV & IRR years 0
1
2
3
4
5

cash flow
(660,000)
128,000
182,000
166,000
168,000
450,000

cash flows
(360,000)
88,000
120,000
96,000
86,000
207,000

LATHE B NPV & IRR
PV Factor
@13%
1
0.885
0.783
0.693
0.613
0.543

PV Factor @13%
1
0.885
0.783
0.693
0.613
0.543

PV
(660,000)
113,274
142,533
115,046
103,038
244,242

PV
(360,000)
77,876
93,978
66,533
52,745
112,351

NPVA

58,133

NPVB

43,483

IRRA

16%

IRRB

17%

ACCEPTABILTY OF EACH PROJECT:

Under the NPV calculations both projects are acceptable because NPV of both project is positive or we can say greater than zero. y y

NPV LATHE A:
NPV LATHE B:

58,133 >
43,483 >

0
0

Lathe A has a larger NPV than B so it is preferable.
IRRs of both projects are greater than the 13% cost of capital so both project are acceptable.
However, 17% IRR for B is greater than the 16% IRR for lathe A so it is B is preferable.

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PART 3:
SUMMARY:
LATHE A

LATHE B

PBP

4.04 years

3.65 years

NPV

58,133

43,483

IRR

16%

17%

Both projects have positive NPVs and IRRs above