Question
The SBX Construction Company is considering whether it should fabricate, purchase, or lease a horizontal boring machine used in highway construction. As a member of
The SBX Construction Company is considering whether it should fabricate, purchase, or lease a horizontal boring machine used in highway construction. As a member of the cross functional team, you have been tasked to make a recommendation on which strategy the company should follow. Although somewhat simplified, the following table represents your best guess of the relevant cash flows. All the numbers are in thousands. Assume that the companys hurdle rate is 8.70%.
Fabricate | Purchase | Lease | |
Cash Outflow Year 0 | ($600) | ($690) | ($570) |
Cash Inflow Year 1 | $210 | $200 | $175 |
Cash Inflow Year 2 | $220 | $230 | $285 |
Cash Inflow Year 3 | $270 | $250 | $220 |
Your assignment is to answer the following questions. Short answers will work for most responses. Be as clear and concise as possible. All answers must be in the table below.
Questions:
(6 Points) Calculate the payback time for each option. Report payback answers to one decimal place (i.e. 3.4 years). Indicate which Option is the best alternative.
(6 Points) Calculate the Average Rate of Return (ARR) for each option. Report ARR to the closest whole percentage (i.e. 22%). Indicate which Option is the best alternative.
(6 Points) Calculate the Net Present Value (NPV) for each option. For NPV use three decimal places in your discount factor (i.e. 0.123). Report NPV in whole dollar amounts (i.e. $23). Indicate which Option is the best alternative.
(6 Points) Calculate the Internal Rate of Return (IRR) associated with each option. For IRR consider hurdle rates to 1 decimal place (i.e. 1.6%). Indicate which Option is the best alternative.
5. (6 Points) Did all four calculations (payback, ARR, NPV, and IRR) reach the same conclusion regarding the preferred option? If you had to select only one acquisition option, which one would you choose? Why? (The why question is the significant portion of this question).
Use the following table to report your answers.
Fabricate Option | Purchase Option | Lease Option | |
Payback in years | 2.6 Years | ||
Average Rate of Return | |||
Net Present Value | |||
Internal Rate of Return |
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