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Investment Analysis

Base scenario:
Your company plans to purchase a new machine. Its purchase price is estimated at 500.000 . You plan to use the machine for 5 years. After that period you will be able to sell the used machine for 30.000 . During usage you have to bear costs for maintenance and repair that amount to 10.000 in the first year of usage and increase by 10.000 per year afterwards. Using that machine you could avoid purchasing components from external suppliers which currently cost 250.000 per year. You have calculated the NPV as shown in the following table.

Description of sub-tasks (weights might be different in actual THE!):
1. Calculation (40%)
You want to contrast NPV with another measure and decide to calculate the accounting rate of return for the investment. Make necessary assumptions to convert cash flow figures into cost and revenue figures and calculate the average accounting rate of return.

2. Interpretation/explanation (40%)
Is this an attractive investment? Why or why not?
How would you explain NPV and rate of return to decision makers who are not familiar with these indicators?

3. Conceptual question (20%)
Which non-monetary factors might influence your decision? How would you try to integrate these factors in your analysis?

 

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