Project Management Homework Management Coursework

Provide all calculation details either in a separate document on in the space after each question. Place your final answers on the last page in the table provided.
Scenario One:
Uncle Sam’s Manufacturing Co. produces metal stamping machines. After five years, the once successful line is no longer selling well, so the company is considering production of an improved line of machines incorporating new green technology. This can be done by buying needed production equipment. There is a six-month manufacturing, delivery, setup, and training delay before the equipment will be ready for production. The company wants to start producing the new line of machines in January next year. Two options are available – lease or buy.
Buy Option – The entire purchase price of the production equipment is $800K and is due at the time of the order. The cost of capital for this purchase is 7%. Assume: (1) the equipment has no residual value at the end of the fifth year and (2) there are no taxes.
Lease Option – The total lease cost is $700K. A $75K deposit is due at the time of the order. The remaining portion of the first year’s lease payment ($65K) is due in January next year. The other four annual lease payments ($140K each) are due in January of production years 2, 3, 4, and 5. The cost of capital for leasing is 16%. Assume no taxes.
Revenue from sales of the new line of metal stamping machines is expected to be:
* Year 1 - $610,000
* Year 2 – $500,000
* Year 3 – $301,000
* Year 4 – $200,000
* Year 5 – $101,000
1 Calculate the
1 net present value of both the new purchase option and $677,109.13
2 the lease option. Show all work. $780,081
Year

Inflows

Outflows

PVIF at 16%

PV

0


($75,000)

1

($75,000)

1

$610,000

($65,000)

0.8621

$469,827.59

2

$500,000

($140,000)

0.7432

$267,538.64

3

$301,000

($140,000)

0.6407

$103,145.89

4

$200,000

($140,000)

0.5523

$33,137.47

5

$101,000

($140,000)

0.4761

($18,568.41)






PV




$780,081

3 Determine the best option for Jones and justify your answer.
The lease option is the best option as it has higher NPV, which indicates higher returns and maximizes value.
2 You used the Excel NPV function with the correct discount rates to calculate NPV and you got the following values: Buy – $632,812.27; Lease - $672,483.77. What did you do wrong?
In both cases it is likely that a higher discount rate was used, and for the lease the total lease cost is $700K needs to be distributed across the period.
3 Calculate IRR for
4 Purchase option 37.25%
5 Lease option 582%
6
4 Assuming projected inflows and outflows are accurate, under what conditions can Uncle Sam’s expect to see a return equal to IRR? Is this realistic?
The project will get higher returns when the IRR increases, and there are no unexpected cash outflows.
Other Related Questions:
5 Based on the NPV profile s...