13 Oct Lynwood Owens
Please respond to the following discussion topic. Your initial post should be a minimum of 300 words in length. Then, make at least two thoughtful responses to your fellow students’ posts.
Assume ABC Company has chosen to invest in new manufacturing equipment. The initial cost of the equipment is $1,200,000. The equipment has a useful life of 20 years. The company uses straight-line depreciation. Their tax rate is 30%. Their weighted average cost of capital is 10%. The new equipment is expected to increase net cash flows by $500,000 in year 1, $350,000 in years 2 through 4, and $100,000 in years 5 through 10. Using all four investment assessment methods (IRR, ARR, NPV, or payback), perform the calculations for this project. Based on just ONE of your calculations should the project be accepted or rejected? Critique the results of the other three calculations you completed. Do they all support your accept/reject decision? Which assessment method is the best?
Lynwood Owens
In my conclusion of this project, I found that this company will lose value of their equipment. It is evident that machinery will depreciate because of maintenance and longevity of use. In my calculations, the company will have around 1/3 value of the original investment. This reminds me of my experience of working in a textile company. For example, the machinery I worked on was production machines that produced fabric for automotive manufactures. I’ve had the experience of watching them perform at peak performance, to barely hanging on with multiple rebuilds and exchanging of critical parts.
If I recall correctly, back in 1992 one weaving machine cost approximately $225K with no additional accessories. My responsibilities were to manage 15 and keep them in production. I departed the company in 2004, one machine with no accessories was approximately ¼ or more of the cost new. Parts where difficult to get and it took around 6 weeks to arrive from the U.K. These machines where not made in the U.S. however, they were the best on the market globally. If something went really wrong, we had to hire an expert technician from the U.K to trouble shoot and correct the problem.
This was more money that was needed to bring in a profession to correct the problems, and use that individual to give us additional training at the same time. All of this was a planned and on a limited time table. I’m not sure what plan my company was using, in reference to NPV. I do know that my company had to make monthly payments on this equipment. It was not on lease. The company in the scenario is very similar to my experience. I believe NPV would have been the better choice. At least the company would receive some return on investment.
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