a. Using the additional information found by the accountant calculate the net present value (NPV) of these projects given that Creak's required rate of return is 14%.b. Using interpolation, calculate the internal rate of return of the two projects.c. Calculate the payback of the projects.d. The Managing Director has sent you a memo, asking how the work is coming along.In the memo she also asks why you prefer NPV as the appropriate method for this decision rather than Payback, IRR, or ARR. Report to the Managing Director summarising, according to the calculations that have been done, which of the options is better and why. In the report you should discuss any other relevant factors that may make you question basing your proposal for the future strategy of Creak Ltd. solely on the above model.
uhuulvl - competitive market. Recent months have seen the solid wood furniture market ooded by an inux of inexpensive hardwood furniture from countries in the Far East. Most of these imports are made by highly automated large volume processes that lead to a generally good standard of nish, although any reasonable inspection reveals the difference in quality between the imports and the excellent products turned out by Creek Ltd. The recent increase in competition has worried the Managing Director of Creak and she has asked the Production Manager to come up with a plan that will quickly produce a substantial reduction in production costs, before Creek's margins are squeezed too tight for operations to continue. The Production Manager points out that the main factor in their costs is their highly skilled labour-force of 52 craftsmen who each earn on average 32,000/year. The competition, he argues, can operate much more cheaply because they have access to far cheaper labour and, due to their level of automation, require much less of it. While there is not much that can be done about the labour rates that Creak pays to its workforce, due to strong unionisation, Creak could, he suggests, significantly reduce its total labour costs by automating as much of its production process as possible. The Managing Director agrees that this is the sensible course of action and asks the Production Manager to investigate the alternatives. By the end of the week the Production Manager has, on the basis of information supplied to him by the sales staff of the machinery companies, narrowed it down to two alternative machines, which will alter the production of Creak as follows: -mam- 2,500 000 3 020 000 235,600 245000 smued emlo relaced EXPected life of machine \"m The Management Accountant is very suspicious of the information provided by the production manager and decides to do some additional research. She uncovers the following additional information: 1. Both machines will require regular maintenance. The estimated cost of this process is 54,000 in years 2 & 4 for machine A and 63,000 for machine B in year 2 and 91,000 in year 4. No overhaul is expected in the year of disposal. 2. An additional sum of working capital will have to be set aside to keep the machines running efciently and without downtime if either of these projects is adopted. The. estimated sums are 47,000 for machine A and 53,000 for machine at This is , recoverable at the end of the project. E a. It is estimated that machine A will have a scrap value of 20.000 at the and of its life. but 1-\"; Adam's-44.x. . . more will be a disposal cost of 200,000 for machine B
