Schultz Inc. is deciding to automate either its Molding department
or its Finishing department. Funds are...
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Schultz Inc. is deciding to automate either its Molding departmentor its Finishing department. Funds are only available for oneautomation. You must decide which department will be automated. Theoriginal cost, net cash inflows, and hurdle rates are shown belowfor each project. Calculate the payback period, internal rate ofreturn, and net present value for each project. Then decide whichdepartment you would choose to automate based on this information.Explain your answer. Calculations and explanations can be given onthis 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:
Answer & Explanation
Solved by verified expert
4.3 Ratings (697 Votes)
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.
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