Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Norwich Tool, a large machine shop, is considering replacing one of its lathes with either of two new lathes lathe A or lathe B .
Norwich Tool, a large machine shop, is considering replacing one of its lathes with either
of two new lathes lathe A or lathe B Lathe A is a highly automated, computercontrolled
lathe; lathe B is a less expensive lathe that uses standard technology. To analyse these
alternatives, Mario Jackson, a financial analyst, prepared estimates of the initial
investment and incremental relevant cash inflows associated with each lathe. These are
shown in the following table.
Lathe A Lathe B
Initial Investment $ $
Year t
$ $
$ $
$ $
$ $
$ $
Note that Mario plans to analyse both lathes over a year period. At the end of that time,
the lathes would be sold, thus accounting for the large fifth year cash inflows.
Mario feels the two lathes are equally risky and the acceptance of either of them will not
change the companys overall risk. He therefore, decided to apply the companys
cost of capital when analysing the lathes. Norwich Tool requires all projects to have a
maximum payback period of years.
Required:
aResearch the concept of Payback period and calculate the Payback period of both
lathes.
bPerform a cost benefit analysis and advise Mario which lathe to acquire.
Do support your assumptions for including any item or variable.
tip: a point listed or an element description is given only one mark
NB give thorough advice to get marks
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started