Norwich Tool case solution

May 19th, 2015
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CASE: MAKING NORWICH TOOLS LATHE INVESTMENT DECISIONS PAR T A: PAYBACK PERIOD ACCEPTABILTY OF EACH PROJECT: Lathe A will be rejected because it¶s payback period is longer than 4 years maximum expected payback period

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Norwich Tool case solutionCASE: MAKING NORWICH TOOLS LATHEINVESTMENT DECISIONSPAR T A:PAYBACK PERIODyearscashflows012345(660,000)128,000182,000166,000168,000450,000PBPALATHE Acumulative cashflowscashflowsLATHE Bcumulative cashflows128,000310,000476,000644,0001,094,000(360,000)88,000120,00096,00086,000207,00088,000208,000304,000390,000597,0004.04PBPB3.65ACCEPTABILTY OF EACH PROJECT:Lathe A will be rejected because its payback period is longer than 4 years maximum expected payback period4.04years > 4yearsLathe B project is accepted because it payback period is less than the 4 year maximum payback period3.65years < 4 years----------------------------------------PART B:NPV &IRRLATHE A NPV & IRRyears012345cash flow(660,000)128,000182,000166,000168,000450,000cash flows(360,000)88,000120,00096,00086,000207,000LATHE B NPV & IRRPV Factor@13%10.8850.7830.6930.6130.543PV Factor @13%10.8850.7830.6930.6130.543PV(660,000)113,274142,533115,046103,038244,242PV(360,000)77,87693,97866,53352,745112,351NPVA58,133NPVB43,483IRRA16%IRRB17%ACCEPTABILTY OF EACH PROJECT:Under the NPV calculations both projects are acceptable because NPV of both project is positive or we can say greater than zero.yyNPV LATHE A:NPV LATHE B:58,133 >43,483 >00Lathe A has a larger NPV than B so it is preferable.IRRs of both projects are greater than the

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