SCPS 371 - Capital Project Evaluation: ABC Manufacturing Co.

This homework assignment focuses on evaluating a capital project for ABC Manufacturing Company, involving the purchase of a new machine to automate production. The analysis includes calculating the Net Present Value (NPV) and Internal Rate of Return (IRR) to determine the project's acceptability. The report discusses the pros and cons of various evaluation methods such as NPV, payback period, IRR, and discounted benefit/cost ratio. Sensitivity analyses are performed to assess the impact of changes in capital spending, operating income, and tax rates. The conclusion indicates that the project is acceptable based on the positive NPV, payback period, IRR exceeding the capital cost, and a high discounted benefit/cost ratio. Desklib offers a variety of solved assignments and study tools for students.

Running head: ORGANIZATIONAL FINANCE
Organizational finance
Name of the student
Name of the university
Student ID
Author note

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Table of Contents
Introduction................................................................................................................................2
Original projections....................................................................................................................2
Conclusion..................................................................................................................................4
Reference....................................................................................................................................5

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Introduction
ABC Manufacturing Company is planning for purchasing a new machine that will
automate the company’s production procedures. Main purpose of the report is to project the
net present value and internal rate of return of the project based on which the acceptability of
the project will be analyzed (Leyman and Vanhoucke 2017).
Original projections
Apart from payback period method various other methods for evaluating the project
shall be used as through one method it is not possible to evaluate the project from all aspects.
For instance, the payback period only shows the time in which the initial investment amount
will be recovered. However, it does not show the net amount to be received from the project
or internal rate of return of the project.
Pros and cons of various method
Net present value –
Pros –

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 Considers present value of future cash flows
 Considers the cost of capital and inherent risk in future projections
Cons –
 Requires guess works regarding cost of capital
 Not useful in comparing 2 projects of different size (Leyman and Vanhoucke 2017)
Payback period –
Pros –
 This method is simple and easy to use
 Different projects can be compared
Cons –
 Does not consider time value of money
 Neglect the value received after the payback period
 Ignores the profitability of project (Nyers et al. 2015).
Internal rate of return –
Pros –
 Provides exact return rate of each project as compared to investment cost
 Different projects can be compared
Cons –
 Does not consider major factors like future cost, duration of project and project size
(Patrick and French 2016)
Discounted benefit / cost ratio –

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Pros –
 Provides added level of the clarity
 Considers overall feasibility of project
 It can be used for developing beneficial policies
Cons –
 It leads to the false confidence
 Does not always provides the indirect benefits
 Adds more value to the biased variables (Boardman et al. 2017)
As all the methods have some pros and cons, based on the preference of the investors
one method may seemed to be better as compared to other.
Conclusion
From the calculation it can be concluded through all the techniques the project is
acceptable as the NPV is positive, payback period is less than 10 years, internal rate of return
is more than capital cost and discounted benefit / cost ratio is high.

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Reference
Boardman, A.E., Greenberg, D.H., Vining, A.R. and Weimer, D.L., 2017. Cost-benefit
analysis: concepts and practice. Cambridge University Press.
Leyman, P. and Vanhoucke, M., 2017. Capital-and resource-constrained project scheduling
with net present value optimization. European Journal of Operational Research, 256(3),
pp.757-776.
Nyers, J., Kajtar, L., Tomić, S. and Nyers, A., 2015. Investment-savings method for energy-
economic optimization of external wall thermal insulation thickness. Energy and
Buildings, 86, pp.268-274.
Patrick, M. and French, N., 2016. The internal rate of return (IRR): projections, benchmarks
and pitfalls. Journal of Property Investment & Finance, 34(6), pp.664-669.