Include the equations or excel spreadsheet used to solve the problems.

The CEO of Dynamic Manufacturing was at a conference and talked to a supplier about a new piece of equipment for its production process that she believes will produce ongoing cost savings. As the Operations Manager, your CEO has asked for your perspective on whether or not to purchase the machinery.

After talking to the supplier and meeting with your Engineers and Financial Analysts, youve gathered the following pieces of data:

Cost of Machine: $150,000

Estimated Annual After Tax Savings: $65,000

Estimated machinery life: 3 years (after which there will be zero value for the equipment and no further cost savings)

You seem to recall that Dynamics Finance organization recommends either a 10% or a 15% discount rate for all Cost Savings Projects. You are fairly sure it is 10%.

You need to understand the project financials to ensure that this investment will be economically attractive to Dynamic Manufacturings shareholders.

Calculate the Nominal Payback, the Discounted Payback, the Net Present Value and the IRR assuming:

Part A, BASE CASE: 3 year project life, flat annual savings, 10% discount rate

Part B. Saving Growth Scenario: BASE CASE but with 10% compounded annual savings growth in years 2 & 3.

Part C, Higher Discount Rate Scenario: 3 year project life, flat annual savings, 15% discount rate

Part D, 5 Year Equipment Life:5 year project and savings life, flat annual savings, 10% discount rate

Discussion in a Word Document in paragraph form, respond to the following:

1.) From a Financial perspective, would you recommend this purchase to Management? Which scenario would you present and why?

2.) In your opinion, which scenario is the most aggressive (i.e is based on the most aggressive assumptions)? If you were to select this scenario as the basis for your proposal, how would you justify the more aggressive assumptions?

3.) In SIMPLE English (as in talking to a non-Finance and non-MBA person), explain why there was a difference in outcome between Part A and Part B.

4.) Beyond Financial measures, what other considerations would you want to consider, before making a recommendation to Management?

5) If you were the CEO, would you approve this proposal? Why or why not?