Financial Management Assignment

Financial Management

Assignment

1. ABC company is considering the replacement of its old, fully depreciated plant. Two models are available.

Plant A costs $ 216,000 has a five-year expected life, and will generate after-tax cash flow saving of $68,200 per year. Plant B cost $ 345,000 has a ten-year expected life, and will generate after-tax cash flow savings of $65,000 per year. The cost of capital is 10%.

Please calculate a) Accounting rate of return b) Payback period c) NPV & d) IRR with your suggestion whether the company should buy Plant A or Plant B.

For Plant A

Cost =$ 216,000

Expected year = 5

Saving per year = $68,200

1. Accounting rate of Return

ARR        = Average annual profit/Initial investment

        = 68200/216000

        = 0.316 or 32%

1. Payback period

Payback Period        = Initial investment made/ Net annual cash inflow

                        = 216000/68200

                        = 3.17 years

1. NPV

NPV                 = Cash Flow/ (1+rate of return) ^ number of time period

                        = 68200/ (1+0.01) ^60

                                =37540.66

1. IRR         

[pic 1]

                        = 17.441%

For Plant B

Cost                 =$ 345,000

Expected year         = 10

Saving per year         = $65,000

1. Accounting rate of Return

ARR        = Average annual profit/Initial investment

        = 65000/345000

        = 0.188 or 18%

1. Payback period

Payback Period        = Initial investment made/ Net annual cash inflow

                        = 345000/65000

                        = 5.31 years

1. NPV

NPV                 = Cash Flow/ (1+rate of return) ^ number of time period

                        = 65000/ (1+0.01) ^120

                                = 19694.66

1. IRR         

[pic 2]

                = -1.958%

I would like to suggest to buy Plant A.