FIN 320 Week 5 Learning Team Assignment Capital Investment Decisions Case Study and Presentation

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FIN 320 Week 5 Learning Team Assignment Capital Investment Decisions Case Study and Presentation

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Learning Team Assignment:Capital Investment Decisions Case StudyNorwich Tool's LatheFIN/320March 13, 2011Financial analysis is important in a company when determining which option will provide the company with more revenue without exposing that company to too much risk. Mario Jackson, who is a financial analyst, will assist Norwich Tool's to the comparison of Lathe A and Lathe B. Mario will also assist the company with a comparison to assist with decision making. Lathe A would be rejected because Norwich Tool's has a maximum payback period of 4.0 years and would not be able to recover its initial investment until the end of the 5-year period of use after the lathe has been sold. Lathe B would be preferred over Lathe A and therefore accepted because the payback period for Lathe B is 3.65 years which is within the maximum payback period of 4.0 years. However, although the payback period to evaluate investment options is simple to compute, gives implicit consideration to the timing of cash flows, and measures risk exposure, it ignores the profitability of the investment after the payback period and it does not truly recognize the time value of money (Gitman, 2006).The capital budgeting technique of net present value takes into consideration the time value of money and is therefore an acceptable method for analyzing profitability of an investment (Gitman, 2006). Lathe A would be preferred over lathe B because its net present value (NPV) of $58,158 is greater than 0, theref

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