Corporate Finance Coursework

Revenue:  $50million/year

Production cost: $47.50million/year

Discount rate: 15% or 0.15 ≈ 1.15

Option A:

Replacement = $800,000 per machine (not involve production cost)

Table 1

NPV = -COST + PV

PV = [pic 1]

        =[pic 3][pic 2]

        = 2.5 (4.1604)

        = $10.401million

NPV = -8m + 10.401m

        = $2.401m

Payback period = 3years + [pic 4]

                = 3.2years

Discounted payback period

Discounted Payback Period = 4years +()[pic 5]

                              = 4.7years

Internal rate of returns = -COST + PV

NPV = 0

IRR = -8 + 2.5/(1+R) + 2.5/(1+R)2 +..... + 2.5/(1+R)7

8 = 2.5 (N = 7, R = ?)

8/2.5 = (N=7, R=?)

3.2 = (N =7, R= 0.24 or 0.25)

Annuity Factor should be between 3.2423 (24%) or 3.1611 (25%)

NPV of 24%        = -8 + [2.5(3.2423)]

        = 0.10575 ≈ $105,750K

NPV of 25%        = -8 + [2.5(3.1611)]

        = -0.09725 ≈ -$97.25K

[pic 6]

So IRR        = 24% + [pic 7]

        =24% + [pic 8]

        = 24% + 0.5209

        = 24.5209% ≈ 24.52%

1a) As per above Table 1

1b) NPV for option A = $2.401m, Payback Periods for option A = 3.2years, IRR for option A = 24.52%

Revenue = $50million

Production cost = $47.5million/year - $0.5million/year(saving in material and operator cost)

                             = $47million

Buy 10 centrally controlled stampers = $1.25million/each x 10

                                                                   = $12.5million

Option B

Table 2

NPV = -COST + PV

PV = [pic 9]

                =[pic 11][pic 10]

        = 3 (5.0188)

        = $15.0564million

NPV = -12.5 + 15.564

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