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Nov 8, 2017 in Informative
I have conducted analysis on the project to purchase a new manufacturing machine for the company. I use several techniques to deduce the viability of the project to the company. Among the technique I used are net present values of the cash flow, payback period, and internal rate of return and modified internal rate of return. While using these techniques, I took note of uncertainty and the risk that is associated with the future value of money put into the investment. I was also concern about the mutual exclusiveness that characterize project that vary in life span and the size.
The net present value of cash flow of the project for the 5 years period indicates a favorable result for the company. The net present value is greater than zero and the exact value is 150,768. The company will be able to generate additional cash flow (150,768) from investing in the new manufacturing machine (Miller &Bahnson, 2002). The pay back period for the project is 2 year 11months. This is estimated time that the company will be able to generate back the money put into the investment. In the first year the company will generates an estimate cash inflow $500,000, $350,000 on the second year, $450, 0000 on the eleven month of the third year. This means the cash flow that will be generated thereafter will be profit for the company. While using this technique I took note of time value of money. There are two type of pay back method. These are discounted payback period and undiscounted pay back period. I used discounted payback which in deducing the pay back period for these investment. It more useful than undiscounted since it takes of time value of money. This indicates that the project is viable for the company in the specified period of five years (Alexander & Britton, 2004).
The internal rate of return also indicates a favorable result for the company. The internal rate of return is 19% which is greater that than 14% cost rate. The difference between the two rates is large enough to accommodate any assumption and risk that is associated to future value of the investment. This indicates that the project is viable for the company and they should consider adopting it (Miller &Bahnson, 2002).
The modified internal rate of return in the other hand indicates a similar favorable for the companies project. The MIRR is 17% and this still is greater than 14% cost for the project. The modified internal rate of return is more reliable since it accommodates the uncertainty of the future value of the money and the risk associated with such investments. It is therefore advisable for the company to venture into the investments since all the technique use to analyze the investment indicates favorable result for the company (Alexander & Britton, 2004). I also recommend that manager should not ignore any other resort that can replace my approach such as chain analysis to find NVP (Alexander & Britton, 2004).