Essays on Purchasing the Lower-Cost Chip Crusher and Higher-Cost Chip Crusher Case Study

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The paper "Purchasing the Lower-Cost Chip Crusher and Higher-Cost Chip Crusher" is a good example of a finance and accounting case study. A venture must be appraised with the aid of after-tax incremental cash flows. Even though zero taxes is assumed in order to focus on the approach of assessment, it just significant cash flows of the period are after all tax effect has been taken into consideration. Net present value is an important tool for summarizing the profitability traits of a venture. Introduction A capital budgeting decision is distinguished from expense as well as advantage that is realized over a long period of time which would lead to the need that the time value for money is taken into consideration so as to appraise the options precisely.

Even though to make an investment decision should take into consideration the risk associated with it and also time value. It is an intricate exercise to assume the time value of money, furthermore, when the cash flows are permitted to be undecided, it may imply that THE employment of the process on the initial recommendation with certainty hypothesis will be lost nothing by making the certain assumption in the forecast. 1.

Incremental cash flows The following are included as incremental cash flow analysis. b) Working capital investment which is 10% of annual scrap revenue; This will affect the incremental initial outlay and thus the effect in working capital changes will be included in order to realize an incremental initial cash outlay to be deducted from the cash flow on investment realized. c) Annual operating costs (i. e. overheads, salaries, and marketing) for each machine; This is an operating cost that has a direct impact on incremental cash flow which must be deducted from the incremental cash in order to realize the net incremental cash flows from the investment. d) The $80,000 that was spent to rehabilitate the plan The cost of rehabilitating the plant is considered to be an incremental initial outlay that must be added to the cost of a new plant in order to get the net incremental initial outlay of the plant. 2.

Which chip crusher (HCC or LCC) would you recommend? Npv The company should consider purchasing the lower-cost chip crusher (LCC)n since it generates a positive net present value which is quite more as compared to the net present value higher-cost chip crusher (HCC) IRR The LCC is depicting a higher IRR of 20.89% which is quite high as compared to IRR for HCC which is an Implication that an investment with high IRR would mean that the business will generate more returns within the shortest time possible. Payback period The LCC option will take 1.5 years to be repaid while for the HCC it will take 2.5 years to be repaid and thus the company should consider undertaking the LCC alternative since the business will take the shortest time possible. EAV Analysis It can be observed that the EAV for LCC is higher as compared To the EAV for HCC which is an indication that LCC is an ideal investment alternative for the company since the business will depict a high value of EAV within the shortest time possible.

References

Executive summary 2

Introduction 2

1. Incremental cash flows 2

b) Working capital investment which is 10% of annual scrap revenue 2

c) Annual operating costs (i.e. overheads, salaries and marketing) for each machine; 2

d) The $80,000 that was spent to rehabilitate the plan 3

Npv 3

Payback period 3

EAV Analysis 3

3. Risk analysis on the project 3

A. sensitivity analysis of NPVs to changes in annual processed scrap revenue and cost of capita 3

Effect of change in Scrap revenue on Npv;HCC Option 3

B. how far the annual net operating cash flow could fall short of forecast before the chip crusher would be rejected 4

C. Effect of inflation {2.5% per annum.} 5

4. Which chip crusher (LCC or HCC) they to invest 5

5. Reasons for your recommendation and any reservations 5

Reservation 5

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