ABC Corporation has a machine that requires repairs or should be replaced. ABC has evaluated the two options and calculated the cash flows resulting from each option as follows:

Option A: Repair the Machine

Year Cash Flow

0 -50,000

1 15,500

2 20,100

3 18,900

4 17,100

5 13,700

Option B: Buy a new Machine

Year Cash Flow

0 -400,000

1 51,300

2 155,000

3 127,800

4 126,900

5 125,100

You have recently been hired by ABC Corporation and your first assignment is to help them decide which of these two options should be pursued. You would like to apply Capital Budgeting and Time Value of Money concepts you have learnt in your finance class to analyze the problem and present your recommendation to your boss, Ms. Jane Austen.

Conduct the analysis by calculating the Internal Rate of Return (IRR) and Net Present Value (NPV) for each option. The company has a Weighted Average Cost of Capital (WACC) of 12%. For this analysis, your boss asked you to calculate NPV at three different discount rates: 12% (the current WACC), 14% and 16%.

Things to turn in:

1. A one-page memo explaining the results of your analysis and your recommendation. The memo should include important results of your analysis such as a summary table or graph. The memo is limited to one page so be very selective on what information to include.

2. An Excel spreadsheet showing calculation of Net Present Value at the 3 discount rates and calculation of Internal Rate of Return.