Capital Budgeting Case

To: Jane Auto Parts
From: Finance Analyst Team
Date: 9/25/2008
Subject: New Equipment-Recommendations

The following information will assist Jane Auto Parts in the decision of purchasing a new laser cutting machine or keeping the current machine. The information will contain the Net Present Value and the Internal Rate of Return on each given scenario. The recommendations will begin with the most beneficial option and end with the least convenient.

The data can be found in the reference pages attached with this document. Each scenario will be given its specific information and will include either a change in: ordinary tax rate, discount rate, or market value.

Scenario 1- 2% Discount Rate

A change in the discount rate, illustrates how the Internal Rate of Return is higher than the discount rate. It is in Jane’s best interest to purchase the equipment since the IRR of 10.91% is greater than the discount rate of 2%. In order to determine the final decision, we need to take Net Present Value into consideration. The NPV at a change of 2% discount rate demonstrates a $276,817.01. The calculations, therefore recommended purchasing the new equipment in this particular scenario.
Scenario 2- 9% Ordinary Tax Rate
With the option of a 9% ordinary tax rate, the calculations result in a 13.28% IRR. Since the IRR is higher than the discount rate, it is recommended that Jane purchases the equipment. The calculated NPV has a value of $194,759.16. Considering the high IRR and the NPV resulting greater than zero, it is in Jane best interest to purchase the equipment.
Scenario 3- Market Value $60,000
If the Market value of the existing machine changes to $60,000, the IRR results in 10.96%. Thus, the IRR is higher than the disc ...
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