Investment Appraisal for Miggy and Brothers Co Essay

Investment Appraisal for Miggy and Brothers Co - Essay ExampleMBC is considering three alternatives as replacements model A which give be sourced from the United States Model B which is a British machine and model C which go forth be imported from France. All of these machineries address $100,000 and are seen to improve the production efficiency of the company and reduce the costs incurred in manufacture. As these are new machines, MBC will be hiring and training personnel who will operate the new equipment. Exact amount is not yet determined but Model C, in particular is expected to incur the highest training cost since the machine is least user-friendly. Models A & B have local dealer which agree to maintain and repair the machines for MBC. In the case of Model C, MBC needs to examine French manufacturers to service the machine in case of emergencies.The choice between the three machines under consideration can be justified by utilizing tools which tests the favourableness of each investment. Three of the most frequently used assessment tools will be employed in MBC decision making. These are retribution arrest, net defend value analysis, and internal rate of return analysis.Aside from the quantitative data given by the management, this report adjusted the figures to enhance the rationale of the choice. In this regard, the unbosom value of the old machine to be replaced is reflected as cash flows in Models A, B, and C. It should be noted that as the acquisition of the new machine will entail discarding the old, all options will benefit from the revenue of selling the old one.Due to equity considerations, this report opted to disregard the salvage value of the three machines on the one-sixth year. Since the salvage value of Models B and C cannot be determined, it is more rational to omit the revenue to be derived from the future sale of the machines.3.1 Payback PeriodThe payback period is one of the simplest ways in ascertaining the feasibility of an investment. This tool is used to determine the length of time that the company can recoup its cash expense (Keown, et al, 2005). Table 2 shows the computed payback period for the three options.Table 2. Payback Period ComputationFrom the above computation, Model A has a payback period of 4 years while the companys investment in Models B and C will be recouped within a shorter period of three years.3.2 Net turn in ValueNet present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows (Keown, et al, 2005). Table 3. Net Present Value ComputationTable 2 shows the computation for the NPV of the three machines under consideration. Model A has an NPV of 6,434 while Models B and C generate discounted cash flows of -7,299 and 16,455, respectively.3.3 inner Rate of ReturnThe internal rate of return is the cost of capital which equates the NPV to zero (Keown, et al, 2005). Table 4 shows the different IRR for each model as computed by Mi crosoft Excel. Consistent with the NPV analysis,