Choo Choo Inc. is a manufacturer of model trains. The company is considering the purchase of...

Choo Choo Inc. is a manufacturer of model trains. The company is considering the purchase of an industrial 3D printer, which will allow the firm to produce custom-made model trains for its high-end customers. The printer will cost $2,500,000, and it is expected to produce net cash flows of $600,000 per year for the next six years. Liquidation of the equipment will net the firm $350,000 in cash at the end of six years. The firm requires a 15% rate of return on all investments. Ignore the effects of taxes.

a. What is the payback period for the proposed investment in the 3D printer? Provide your answer in number of years and months.

b. What is the printer’s discounted payback period? Provide your answer in number of years and months.

c. Choo Choo’s cutoff period is set at five years. Based on the payback period investment criterion, will the company purchase the printer? Will it purchase the printer based on the discounted payback period investment criterion?

d. What is the printer’s net present value (NPV)? Should the company purchase the printer based on the NPV investment criterion?

e. What is the printer’s profitability index (PI)? Should the company purchase the printer based on the PI investment criterion?

f. What is the printer’s internal rate of return (IRR)?

g. Check that at the internal rate of return (IRR) the net present value of the printer is $0. Should the company purchase the printer based on the IRR investment criterion?

h. Based on your answers in parts a to f above, what decision do you recommend for Choo Choo?

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Expert Solution

jeff jeffy answered 1 year ago

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