Capital Budgeting Analysis: NPV Evaluation of Two Machines

Should Emily Jones Recommend Purchasing the Nakoi or Dakota Machine?

This analysis evaluates the potential purchase of two machines, the Nakoi and the Dakota, using Net Present Value (NPV) calculations. Based on the provided financial information and a discount rate of 17%, we will determine if either machine represents a worthwhile investment.

Initial Analysis

The provided financial data outlines projected sales, material costs, labor costs, maintenance costs, overhead costs, depreciation, and profit for a seven-year period for both machines. Using a discount rate of 17%, the Net Present Value (NPV) for each machine is calculated as follows:

• Nakoi: -$797,942* Dakota: -$563,697

Conclusion: Based on this initial analysis, neither machine is recommended for purchase. Both machines yield a negative NPV, indicating they would likely result in a net loss for the company.

Scenario Analysis

To account for potential market fluctuations, we've analyzed two additional scenarios with varying selling price and cash cost growth rates.

Scenario (i):

• Selling Price Growth Rate: 3%* Cash Costs Growth Rate: 4%

Under this scenario, the NPV for both machines remains negative:

• Nakoi: -$101,152* Dakota: -$701,457

Scenario (ii):

• Selling Price Growth Rate: 5%* Cash Costs Growth Rate: 2%

Even with a more optimistic outlook, both machines still result in a negative NPV:

• Nakoi: -$259,281* Dakota: -$556,680

Final Recommendation:

Across all scenarios analyzed, including varying growth rates for selling prices and cash costs, both the Nakoi and Dakota machines consistently yield a negative NPV. This strongly suggests that neither machine is a financially viable investment opportunity. Emily Jones should recommend that the company does not purchase either machine at this time.

Additional Considerations:

While this analysis provides a strong financial framework for decision-making, there may be additional qualitative factors to consider, such as:

• Technological Advancements: Are there newer, more efficient machines expected on the market soon?* Strategic Alignment: How do these machines align with the company's long-term strategic goals?* Risk Tolerance: What is the company's appetite for risk, and how does that factor into the decision?

A holistic assessment considering both quantitative and qualitative factors will ultimately lead to the most informed investment decision.