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Homework answers / question archive / Advanced Engineering (Pty) Ltd needs to replace one of the profile cutters in its factory with a computer-operated profile cutter

Advanced Engineering (Pty) Ltd needs to replace one of the profile cutters in its factory with a computer-operated profile cutter

Finance

Advanced Engineering (Pty) Ltd needs to replace one of the profile cutters in its factory with a computer-operated profile cutter. Alfred, the factory manager, identified a replacement profile cutter and prepared the following information for management to consider: Year Net cash flows 1 140 000 2 120 000 3 95 000 4 70 000 5 50 000 The initial required investment is R325 000 and the company's cost of capital is 13%. Alfred calculated the net present value (NPV) of the investment as R28 755. The financial manager, however, requested that Alfred also calculate the internal rate of return (IRR) for this project before tabling the information for decision-making. The financial manager instructed Alfred to use an alternative cost of capital of 18% for his calculations. Required: Note: Show all your calculations and round off all calculations to the nearest whole number. 3.1. Use the information provided to calculate the internal rate of return (IRR) of this proposed investment (20) 3.2. Should the company invest in this profile cutter based on Alfred's NPV and IRR calculations? Substantiate your answer based on relevant decision criteria.

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