Mrs. Stellar Conch is the owner of an expanding business operating in bakery industry located in Kinston, Jamaica. Over the last few years business has been great. However, she believes it is time to grow and be more profitable. As such Mrs. Conch has decided to invest in a new sophisticated convection oven that would boost production levels by 200% in a more efficient manner. As an astute assistant manager to Mrs. Conch have asked you to analyze the following variables to assist in informing the correct decision: 1. Mrs. Conch is considering investing in one of two convection ovens - Type ABC and Type XYZ; 2. The initial investment costs of ovens Type ABC and Type XYZ are both $120,000 each; 3. Over a 5 year period directly following the investment, projected revenue attributed to the Type ABC oven is $70,000 a year. While projected expenditure is $40,000 a year for the Type ABC oven; This is not the same for the Type XYZ oven investment, which is projected to only have revenue and expenditure of $305,000 and $125,000 respectively in the fifth year; The situation that surrounds the current oven (old) is that if it sold/traded-in under the Type ABC oven investment arrangement then Mrs. Conch will receive a $12,000 profit a year on such a sale over a 5 year period; . Conversely with the Type XYZ oven investment the current oven if sold/traded-in will yield a $40,000 profit at the end of year 5; Assume no tax is applied to the business; 8. The cost of capital for each investment is 12%. You are required to: i. Compute each investment’s Internal Rate of Return (IRR). ii. Which investment should Mrs. Conch accept and why? iii. Based on the above calculations and analysis, what has caused the ranking conflict? .
Mrs. Stellar Conch is the owner of an expanding business operating in bakery industry located in Kinston, Jamaica. Over the last few years business has been great. However, she believes it is time to grow and be more profitable. As such Mrs. Conch has decided to invest in a new sophisticated convection oven that would boost production levels by 200% in a more efficient manner. As an astute assistant manager to Mrs. Conch have asked you to analyze the following variables to assist in informing the correct decision: 1. Mrs. Conch is considering investing in one of two convection ovens - Type ABC and Type XYZ; 2. The initial investment costs of ovens Type ABC and Type XYZ are both $120,000 each; 3. Over a 5 year period directly following the investment, projected revenue attributed to the Type ABC oven is $70,000 a year. While projected expenditure is $40,000 a year for the Type ABC oven; This is not the same for the Type XYZ oven investment, which is projected to only have revenue and expenditure of $305,000 and $125,000 respectively in the fifth year; The situation that surrounds the current oven (old) is that if it sold/traded-in under the Type ABC oven investment arrangement then Mrs. Conch will receive a $12,000 profit a year on such a sale over a 5 year period; . Conversely with the Type XYZ oven investment the current oven if sold/traded-in will yield a $40,000 profit at the end of year 5; Assume no tax is applied to the business; 8. The cost of capital for each investment is 12%.
You are required to:
i. Compute each investment’s
ii. Which investment should Mrs. Conch accept and why?
iii. Based on the above calculations and analysis, what has caused the ranking conflict? .
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