Question

Ventura Manufacturing is considering an investment in a new automated manufacturing system. The new system requires an investment of $3,000,000 and either has (a) even cash flows of $750,000 per year or (b) the following expected annual cash flows: $375,000, $375,000, $1,000,000, $1,000,000, and $250,000.

Answer 1

Ventura Manufacturing is considering investing $3,000,000 in a new automated manufacturing system with different cash flow options. By calculating the NPV and IRR, they can determine which option is more financially beneficial.

Step-by-step explanation:

When evaluating an investment, one important factor to consider is the expected cash flows. In the case of Ventura Manufacturing, they are considering investing $3,000,000 in a new automated manufacturing system. The system can have either even cash flows of $750,000 per year or the following expected annual cash flows: $375,000, $375,000, $1,000,000, $1,000,000, and $250,000.

By calculating the Net Present Value (NPV) of each investment option, Ventura Manufacturing can determine which option is more financially beneficial. The NPV is calculated by discounting the cash flows using a specified discount rate, typically the company's cost of capital. The option with a higher NPV is more favorable.

Additionally, the Internal Rate of Return (IRR) can also be calculated to assess the profitability of the investment. The IRR is the discount rate that makes the NPV of the cash flows equal to zero. If the IRR is higher than the company's cost of capital, the investment is considered profitable.

Answer 2

4 years

5 years

Step-by-step explanation:

Ventura Manufacturing is considering an investment in a new automated manufacturing system. The new system requires an investment of $3,000,000 and either has:

a. Even cash flows of $750,000 per year or

b. The following expected annual cash flows: $375,000, $375,000, $1,000,000, $1,000,000, and $250,000

Calculate the paycheck period for each case

a. ? years

b. ? years

Payback calculates the amount of time it takes to recover the amount invested in a project from it cumulative cash flows

Payback period = Amount invested / cash flow

3,000,000 / 750,000 = 4 years

b. the sum of the cash flows is 3,000,000. thus the amount invested would be recovered in 5 years