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Investment Appraisal for Miggy and Brothers Co. - Essay Example
Miggy and Brothers Co (MBC) is a manufacturing firm specializing in the production of customized furniture. In order to increase its production efficiency, the company standardizes some of the components of the furniture. …
MBC is considering three alternatives as replacements: model A which will be sourced from the United States; Model B which is a British machine; and model C which will be imported from France. All of these machineries cost $100,000 and are seen to improve the production efficiency of the company and reduce the costs incurred in manufacture. As these are new machines, MBC will be hiring and training personnel who will operate the new equipment. Exact amount is not yet determined but Model C, in particular is expected to incur the highest training cost since the machine is least user-friendly. Models A & B have local dealer which agree to maintain and repair the machines for MBC. In the case of Model C, MBC needs to seek French manufacturers to service the machine in case of emergencies.
The choice between the three machines under consideration can be justified by utilizing tools which tests the profitability of each investment. Three of the most frequently used assessment tools will be employed in MBC decision making. These are payback period, net present value analysis, and internal rate of return analysis.
Aside from the quantitative data given by the management, this report adjusted the figures to enhance the rationale of the choice. In this regard, the salvage value of the old machine to be replaced is reflected as cash flows in Models A, B, and C. ...