12 Making Norwich Too's Lathe Investment Decision Norwich Tool, a large machine shop, is conaideding replecing one ofitslahes with either of bo, new late, late A or late8.Lathe A i, a hig y 1onated, omputohantoled ite athe B is a less expensive lathe that uses standard technology To analyze these alternatives, Marlo Jackson, a financia analyst prepared estimates of the inial investment and incremental (relevant) cash inflows associated with each lathe These are shown in the following table. Cick on the loon located on the top-ight corner of the data table below in order to copy is content intoa Lathe A $660,000 Lathe B 360,000 initial Investment (CF) Year (t) Cash inflows (CF) $128,000 182,000 66,000 96,000 6,000 207,000 450,000 Note that Mario plans to analyze both lathes over a 5-year period. At the end of that time, the lathes would be sold, thus accounting for the large fifth-year cash inflows Mario believes that the two lathes are equally risky and that the acceptance of either of them wl not change the fims overall risk. He therefore decides to apply the firm's 13.0% cost ofcapital when aralyzing the intet Norwich Todreons all projects to have a maximum payback period of 4.0 years. To Do a. Use the payback period to assess the acceptability and relative ranking of each lathe b. Assuming equal risk, use the folowing sophisticated capital budgeting techniques to assess the acceptability and relative ranking of each lathe (1) Net present value (NPy) (2) Intemal rate of return QRR) c. Summarize the preferences indicated by the techniques used in parts (a) and (b). Do the projects have conficting d. Draw the net present value profiles for both projects on the same set of axes, and discuss any conflict in rankings that may exist between NPV and IRR. Explain any observed conflict in terms of the relative differences in the magnitude and timing of each projects cash fows eUse your findings in parts a through d to indicate, on both (1) a theoretical basis and (2) a practical basis, which lathe would be preferred. Explain any difference in recommendations a. Use payback perod to assess the acceptatity and roiaENo unirg of each-the The payb ack period for lathe A wl be years (Round to two decimal places.) The payback perod for lathe B will b years Round to two deciemal places j Select trom the drop-down menus wil be rejected snce the payback s onger than the 4 year maximum accepted, and s accepted bec ause the projedt payback perod is less than the 4year pa yback autot b Assuming equal ra use the following soph stc ated capital budgeting techiques to assoss the acceptabity and 1Net present value INPV