Question
In many projects, there are different employees who have different specialties who feel that the project will either need to use a higher hurdle rate
In many projects, there are different employees who have different specialties who feel that the project will either need to use a higher hurdle rate or have different cash flows. Some will feel the cash flows will last longer or the hurdle rates will change.
Look at the four scenarios below and prepare a spreadsheet that gives the
Payback
Discounted Payback
NPV
IRR
Your company has the opportunity to make an investment in a new piece of machinery that could produce a revenue stream for the company. The cost of this project is $750,000. It is estimated that the project will bring in $225,000 each year. Below are how the various employees in the company feel the cash flows and hurdle rates should be treated.
Richard Richard from Accounting feels the project would have a 5-year life and should use the companys cost of capital of 12%.
Anne Anne from sales is convinced that the project will bring in MORE than $225,000 each year. She believes that years 2-5 will bring in 10% more than the previous year. Anne also feels the hurdle rate should be 12%.
Adam- Adam from engineering thinks that this is a very risky project and therefore is recommending the use of a higher discount rate. Adam feels a 17% discount rate is more in line with the riskiness of the project.
Caroline Caroline, the Product Manager really wants the company to buy this machine. She feels the machine will produce cash flows longer than five years. She estimates that there will be 7 years of cash flows, not 5. Caroline feels the 12% hurdle rate is accurate.
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