Managerial Finance for Norwich Tool- MyAssignmenthelp.com

Question: Discuss about theManagerial Finance for Norwich Tool. Answer: Introduction: This case study deals with a particular organisation, Norwich Tool, which is a big lathe machine shop. The organisation has been thinking of replacing a machine with one of the two available machines, which are either lathe A and lathe B. Lathe A functions automatically and it is controlled with the help of computer. Due to the presence of such advanced technology, the organisation might be able to increase its overall production (Almarri Blackwell, 2014). On the contrary, lathe B is comparatively of lower cost, since it utilises standard technology. For assessing such two alternatives, the organisation has recruited a financial analyst to develop projections of initial investments and pertinent cash inflows associated with the two lathes. Thus, the different methods of capital budgeting like net present value, payback period and internal rate of return are utilised to ascertain the overall viability of the project. With the help of these techniques, Norwich Tool could determine the overall return and profitability of the two proposed machines. Based on the evaluation of these techniques, the financial analyst has provided suggestions to Norwich Tool through the assumption that it has capital rationing or unrestricted funds. Payback Period to assess the Acceptability and Relative Ranking of each Lathe: Figure 1: Payback periods of the two proposed lathes (Source: As created by author) From the provided case, it has been detected that the maximum payback period, which Norwich Tool could accept, is 4 years. In the words of Baum Crosby (2014), payback period denotes the time, in which the initial investment of a project could be regained from the possible project cash inflows. This technique of investment appraisal is a considerable indicator of determining whether to continue ahead with the project. This is because greater the payback period, the less feasible an option is for a specific investment. According to the above table, the payback period of lathe A is 4.05 years, while the same for lathe B is obtained as 3.65 years. Since the payback period for lathe A is greater in contrast to the accepted payback period of 3.65 years and reverse in case of lathe B, lathe B is a feasible alternative for investing in the context of the organisation. Capital Budgeting Technique to Assess the Acceptability and Relative Ranking of Each Lathe: Net Present Value (NPV): Based on the table above, it is inherent that lathe A has positive NPV, which is computed as $58,133, while that for lathe B is computed as $43,483. In this context, Gtze, Northcott Schuster (2015) stated that the greater the NPV, the more feasible the investment is for the organisation, as it would help in providing greater returns on investment. In this case, the NPV of lathe A is greater, which signifies the organisation in undertaking lathe A for increasing returns on investment. Therefore, according to the NPV value, lathe A needs to be accepted. However, it has been observed that the payback period of lathe A is above the desired limit and lathe B has positive NPV as well. Therefore, lathe B should be undertaken, as it fits the criteria of the organisation. With the help of NPV, an organisation often undertakes projects, since it has greater realistic assumptions and better profitability measure (Liesen, Figge Hahn, 2013). Internal Rate of Return (IRR): According to the above table, it could be stated that lathe A has positive IRR, which is found as 15.95% and that for lathe B is found as 17.34%. In this regard, King (2013) stated that internal rate of return helps in increasing the overall return on investment; thereby, increasing the overall organisational profitability. The more the value of IRR, the more is the ability of a firm to increase the overall return on investment. Therefore, based on the values of IRR, lathe B needs to be accepted. Recommendation to the Firm about the Selection of Lathe: Unlimited Funds: If the organisation has unlimited funds, the initial priority would be provided to lathe B, since both the NPV and IRR values are positive. Moreover, the payback period is within the desired range and lathe A has positive NPV and IRR, both the lathes could be purchased. Capital Rationing: For capital rationing, the organisation needs to select lathe B, as lathe A has payback period, which is above the accepted level. Moreover, the fund limitations of the organisation states that project B should be accepted for meeting all the basic criteria. Conclusion: The above evaluation clearly states that lathe B needs to be accepted, as it meets all the primary requirements of the organisation. This is because the payback period of lathe A is above the desired limit and lathe B has positive NPV as well. Therefore, lathe B should be undertaken, as it fits the criteria of the organisation. References: Almarri, K., Blackwell, P. (2014). Improving risk sharing and investment appraisal for PPP procurement success in large green projects.Procedia-Social and Behavioral Sciences,119, 847-856. Baum, A. E., Crosby, N. (2014).Property investment appraisal. John Wiley Sons. Gtze, U., Northcott, D., Schuster, P. (2015). Selected Further Applications of Investment Appraisal Methods. InInvestment Appraisal(pp. 105-159). Springer Berlin Heidelberg. King, N. (2013).U.S. Patent No. 8,433,591. Washington, DC: U.S. Patent and Trademark Office. Liesen, A., Figge, F., Hahn, T. (2013). Net present sustainable value: a new approach to sustainable investment appraisal.Strategic Change,22(3?4), 175-189