Suppose you are the chief financial officer for a pencim making firm that needs a new...

Suppose you are the chief financial officer for a pencim making firm that needs a new machine. Discuss the basic steps that you must go through to make this happen and the decisions that must be made for each one.

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Expert Solution

As a chief financial officer(CFO) for a pencil making firm, if there is a need for new machine then the first step that needs to be done is investment appraisal. It is done inorder to access that how the funds that are invested, maximises the shareholders wealth. The four widely used appraisal methods are:

Non Discounted Methods: Accounting rate of return (ARR) and The payback period (PP)

Discounted Cash Flow Methods: Net present value (NPV) and Internal rate of return (IRR)

Now, lets discuss some advantages of each of these methods:

ARR considers the whole life of the project.
PP is a simple measure of risk.
NPV consider the time value of money.
IRR gives a percentage result that can be easily understood and compared with the minimum rate of return required.

Hence now it can be said that these calculations will ultimately help me to access the future potential of this investment in new machine.

jeff jeffy answered 1 year ago

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