The J. W. Johnson Company, a producer of toy trains, is trying to update its locomotive production facility (in order to increase total profits) with a state of the art machine used to cast the train wheels. It his a choice between two alternative machines (A) or (B). To avoid a bottleneck in the production process, Jeff Johnson, the vice President of the company, felt that the axle machine should also be replaced. After some deliberation it was decided that one of the three machines-(C), (D), or (E)-would also be replaced to complement the wheel casting machine.

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Cash Flows ------------------------------------------------------------------------------------------------ Outlay Year1 Year2 Year3 ------------------------------------------------------------------------------------------------ Machine A $ 10,000 $ 15,000 $ 15,000 $ 15,000 Machine B $ 80,000 $ 60,000 $ 60,000 $ 60,000

Machine C $ 100,000 $ 70,000 $ 70,000 $ 70,000 Machine D $ 90,000 $ 65,000 $ 4.5,000 $ 90,000 Machine E $ 110,000 $ 75,000 $ 95,000 $ 65,000 -------------------------------------------------------------------------------------------------

QUESTIONS

1. From the information provided calculate the NPV (Net Present Value) and IRR (Internal Rate of Return) of each separate project. Assume a discount rate of 10%.

2. Projects (A) and (B) are independent of any of the projects (C), (D), or (E), but one from each of the groups must be chosen. Calculate the NPV and IRR of each of the possible combinations of projects.

3. Which projects should be chosen?

4. Illustrate the concept of IRR on a graph.

5. What other ways can you think of to use charts to analyze this problem?