- Mr Tony Is Working In The Financial Department Of A Company That Manufactures Leather Products The Company Is Consider 1 (130.95 KiB) Viewed 33 times
- Mr Tony Is Working In The Financial Department Of A Company That Manufactures Leather Products The Company Is Consider 2 (78.54 KiB) Viewed 33 times
Mr. Tony is working in the Financial Department of a company that manufactures leather products. The company is considering two prospective projects as follow: Project 1: Launching a new leather bag. The supplier offers two options that have different cash outlay and generate different revenue but the same useful life of 5 years. The table below shows the estimated data available to the company's Management: Option A Option B Initial Investment 2410000 2630000 Annual Cash Inflow Year 1 580000 630000 Year 2 640000 690000 Year 3 720000 712000 Year 4 750000 804000 Year 5 960000 1080000 Project 2: Buying a new machinery for jackets designing. The company has got two options that will generate the same revenue for each year. The table below shows the initial and annual costs for each option. Option A Option B Initial Investment 3100000 3500000 Annual Cost Year 1 84000 70000 Year 2 84000 70000 Year 3 84000 70000 Year 4 84000 70000 Year 5 70000
You are required to help Mr. Tony in writing a report to the company's management: 1. To select a suitable method among different investment criteria of Net Present Value, Equivalent Annual Cost, Profitability Index, Internal Rate of Return, Simple Payback Period and Discounted Payback period for each project, given the market required rate of return for all projects is 11.2% and the company's benchmark of payback is maximum 3.5 years. The recommendation must include the justification on why to choose the specific method based on its pros and cons compared to other methods. 2. To perform the selected method and present the outcome of project evaluation and recommend the option A or B should the company choose for each project, the justification must include calculation steps and numerical outcomes.