In: Accounting
Schultz Inc. is deciding to automate either its Molding department or its Finishing department. Funds are only available for one automation. You must decide which department will be automated. The original cost, net cash inflows, and hurdle rates are shown below for each project. Calculate the payback period, internal rate of return, and net present value for each project. Then decide which department you would choose to automate based on this information. Explain your answer. Calculations and explanations can be given on this worksheet. | ||||
Molding | ||||
Hurdle Rate: | 14% | |||
Original Cost: | $ (845,000) | |||
Net Cash Inflows: | ||||
Year 1 | $ 267,000 | |||
Year 2 | 245,000 | |||
Year 3 | 221,000 | |||
Year 4 | 215,000 | |||
Year 5 | 190,000 | |||
Year 6 | 168,000 | |||
Payback period: | ||||
Internal Rate of Return: | ||||
Net Present Value: | ||||
Molding | ||||||||
Hurdle Rate: | 14% | Cumulative Cash flows | PVIF at 14% | PV at 14% | PVIF at 15% | PV at 15% | PVIF at 16% | PV at 16% |
Original Cost: | -845000 | -845000 | 1 | -845000 | 1 | -845000 | 1 | -845000 |
Net Cash Inflows: | ||||||||
Year 1 | 267000 | -578000 | 0.87719 | 234211 | 0.86957 | 232174 | 0.86207 | 230172 |
Year 2 | 245000 | -333000 | 0.76947 | 188520 | 0.75614 | 185255 | 0.74316 | 182075 |
Year 3 | 221000 | -112000 | 0.67497 | 149169 | 0.65752 | 145311 | 0.64066 | 141585 |
Year 4 | 215000 | 103000 | 0.59208 | 127297 | 0.57175 | 122927 | 0.55229 | 118743 |
Year 5 | 190000 | 293000 | 0.51937 | 98680 | 0.49718 | 94464 | 0.47611 | 90461 |
Year 6 | 168000 | 461000 | 0.45559 | 76539 | 0.43233 | 72631 | 0.41044 | 68954 |
29415 | 7762 | -13009 | ||||||
Payback period: = 3+112000/215000 = | 3.52 | Years | ||||||
Internal Rate of Return: = 15+7762/(7762+13009)= | 15.37% | |||||||
Net Present Value: | $29415 | |||||||
NOTE: | ||||||||
DETAILS FOR THE FINISHING DEPARTMENT NOT GIVEN. |