PerfectCustomPapers | The Allied Group is considering two investments

The Allied Group is considering two investments

The Allied Group is considering two investments. The first investment involves a packaging machine, which can be used to package garments for shipping orders to customers. The second possible investment would be a molding machine that would be used to mold the mannequin parts.

The first possible investment is the packaging machine, which will cost $14,000. The second investment, the molding machine, would cost $12,000. The expected cash flows for the two projects are given below and the cost of capital to the firm is 15%. Both machines will be unusable after five years and have no salvage value.
The net cash flows for the two possible projects are given in the following table:
Year Packaging Machine Molding Machine
0 ($14000) ($12,000)
1 4100 3200
2 3300 2800
3 2900 2800
4 2200 2200
5 1200 2200
Address all of the following questions in a brief but thorough manner.

What is each project’s payback period? Provide a detailed explanation of how you calculated the payback period for each.
What is the NPV for each project? Provide a detailed explanation of how you calculated the payback period for each.
What is the IRR for each project? Provide a detailed explanation of how you calculated the internal rate of return (IRR) for each

Sample Answer

Allied Group Investment Analysis

Payback Period:

Packaging Machine:
- Total cash inflow needed to recover initial cost ($14,000) = Initial Investment
- Cash inflows in year 1 ($4,100) are less than the initial investment.
- We need to find the year where the cumulative cash inflows recover the initial investment.
- In year 2, cash inflow is $3,300. Add this to year 1’s inflow: $4,100 + $3,300 = $7,400. This is still not enough.
- To recover the remaining $6,600 ($14,000 – $7,400), we look at year 3’s cash inflow ($2,900). We only need a portion of year 3’s inflow to reach $14,000.
- Payback Period (Packaging Machine) = 2 years + ($6,600 / $2,900) = 2.24 years.

Full Answer Section

Molding Machine:
- Following the same logic as above:
- Payback Period (Molding Machine) = 1 year + ($9,200 / $3,200) = 2.88 years.

Net Present Value (NPV):

NPV considers the time value of money and discounts future cash flows back to their present value using the cost of capital (15%).

Formula:

NPV = Σ (Cash Flow at Year t / (1 + Cost of Capital)^t) - Initial Investment

Packaging Machine:
- Year 0: -$14,000 (Initial Investment – negative value)
- Year 1: $4,100 / (1.15)^1 = $3,565
- Year 2: $3,300 / (1.15)^2 = $2,793
- Year 3: $2,900 / (1.15)^3 = $2,432
- Year 4: $2,200 / (1.15)^4 = $1,842
- Year 5: $1,200 / (1.15)^5 = $992
- NPV (Packaging Machine) = -$14,000 + $3,565 + $2,793 + $2,432 + $1,842 + $992 = -$3,376
Molding Machine:
- Following the same calculation process:
- NPV (Molding Machine) = -$12,000 + $2,783 + $2,413 + $2,432 + $1,842 + $992 = $1,840

Internal Rate of Return (IRR):

IRR is the discount rate at which the NPV of a project becomes zero. It’s essentially the interest rate the project itself generates.
Finding IRR usually involves trial and error or using financial calculators/spreadsheets. Here’s a simplified explanation:
We know the NPV of each project is negative at the cost of capital (15%).
We need to find a discount rate that would make the NPV of each project equal zero.
Packaging Machine:
- The IRR for the Packaging Machine would be between 0% (guarantees positive NPV) and 15% (given negative NPV at 15%).
Molding Machine:
- The IRR for the Molding Machine would be higher than 15% (negative NPV at 15% but positive overall NPV).

In Conclusion:

Based on payback period, the Packaging Machine appears quicker to recover the initial investment.
However, NPV analysis reveals a negative value for the Packaging Machine, indicating a loss at the cost of capital of 15%.
The Molding Machine, although having a longer payback period, has a positive NPV, suggesting it generates returns higher than the cost of capital.
IRR further clarifies that the Molding Machine offers a better return on investment compared to the Packaging Machine.

Recommendation:

Based on this analysis, the Molding Machine appears to be the better investment for the Allied Group. It offers a positive NPV and a higher IRR, indicating better profitability.

This question has been answered.

Get Answer

No More Worries!

Paper Formatting

No Lateness!

Our Guarantees

The Allied Group is considering two investments

Sample Answer

Allied Group Investment Analysis

Full Answer Section

This question has been answered.

Satisfaction Guaranteed

Why Choose Us