Essay About Initial Investment And Five-Year

Financial Management Assignment
Financial ManagementAssignmentABC company is considering the replacement of its old, fully depreciated plant. Two models are available.Plant A costs $ 216,000 has a five-year expected life, and will generate after-tax cash flow saving of $68,200 per year. Plant B cost $ 345,000 has a ten-year expected life, and will generate after-tax cash flow savings of $65,000 per year. The cost of capital is 10%.Please calculate a) Accounting rate of return b) Payback period c) NPV & d) IRR with your suggestion whether the company should buy Plant A or Plant B.For Plant ACost =$ 216,000Expected year = 5Saving per year = $68,200Accounting rate of ReturnARR        = Average annual profit/Initial investment        = 68200/216000        = 0.316 or 32%Payback periodPayback Period        = Initial investment made/ Net annual cash inflow                        = 216000/68200                        = 3.17 yearsNPVNPV                 = Cash Flow/ (1+rate of return) ^ number of time period                        = 68200/ (1+0.01) ^60                                =37540.66IRR         [pic 1]                        = 17.441%For Plant BCost                 =$ 345,000Expected year         = 10Saving per year         = $65,000Accounting rate of ReturnARR        = Average annual profit/Initial investment        = 65000/345000        = 0.188 or 18%Payback periodPayback Period        = Initial investment made/ Net annual cash inflow                        = 345000/65000                        = 5.31 yearsNPVNPV                 = Cash Flow/ (1+rate of return) ^ number of time period                        = 65000/ (1+0.01) ^120                                = 19694.66IRR         [pic 2]                = -1.958%I would like to suggest to buy Plant A.