DECISION MAKING

Business Decision-Making in Lamberts Heating

Business Decision-Making in Lamberts Heating

Part A - Alternative Proposal Evaluation

In the present scenario, Lamberts Heating is in the need to replace factory machinery, which is used in manufacturing radiators. The company is available with three alternatives to purchase the desired machinery. The report conducts appraisal evaluation of each available investment proposal under three techniques including discounted payback period, NPV and IRR.

Based on the comparative study, strength and weakness analysis and consideration of every possible financial aspect, the report provides recommendation to Lamberts Heating regarding the machinery purchase decision.



Alternative Proposal 1 - Alumier Machine

The first alternative will keep Lambert connected with the same supplier and the investment will result in straight replacement of the machine. Lambert will incur an investment outlay of £ 500, 000 to purchase this machinery with a useful life of 6 years. Figure 1 illustrates estimated cash flows over the useful life of the investment.

Figure 1: Expected Cash Flows of Alumier Machine

Discounted Payback Period

Alumier Machine

Years (n)

Cash Flows

Present Value Factor

Discounted Cash Flows

Cumulative Discounted Cash Flows

0

(500,000)

1.0000 (500,000)

(500,000)

1

50,000 0.9091 45,455 (454,545)

2

100,000 0.8264 82,645 (371,901)

3

150,000 0.7513 112,697 (259,204)

4

150,000 0.6830 102,452 (156,752)

5

150,000 0.6209 93,138 (63,613)

6

170,000 0.5645 95,961 32,347

Discounted Payback Period (years)

4.34

 

 

 

 

 

Table 1: DPP Evaluation of Alumier Machine

Net Present Value (NPV)

Alumier Machine

Years (n)

Cash Flows

Present Value Factor

Discounted Cash Flows

0

(500,000)

1.0000 (500,000)

1

50,000 0.9091 45,455

2

100,000 0.8264 82,645

3

150,000 0.7513 112,697

4

150,000 0.6830 102,452

5

150,000 0.6209 93,138

6

170,000 0.5645 95,961

NPV

29,407 32,347

 

 

 

 

Table 2: NPV Evaluation of Alumier Machine

Internal Rate of Return (IRR)

IRR

12%

NPV @ 12%

($2,055.08)

NPV @ 11%

$13,155.21

IRR

10%

 

 

Table 3: IRR Evaluation of Alumier Machine

Alternative Proposal 2 -Big EZ Machine

Big EZ machine is the second alternative investment proposal available to Lambert. The company would require making same amount of investment at a discount rate of 10%. With no residual value, the machine is expected to generated cash flows for six useful years (figure 2).

Figure 2: Expected Future Cash Flows for Big EZ Machine

Discounted Payback Period

Big EZ Machine

Years (n)

Cash Flows

Present Value Factor

Discounted Cash Flows

Cumulative Discounted Cash Flows

0

(500,000)

1.0000 (500,000)

(500,000)

1

200,000 0.9091 181,818 (318,182)

2

150,000 0.8264 123,967 (194,215)

3

150,000 0.7513 112,697 (81,518)

4

50,000 0.6830 34,151 (47,367)

5

25,000 0.6209 15,523 (31,844)

6

25,000 0.5645 14,112 (17,732)

Discounted Payback Period (years)

N/A (Recovery time>6years)

 

 

 

 

 

Table 4: DPP Evaluation of Big EZ Machine

Net Present Value (NPV)

Big EZ Machine

Years (n)

Cash Flows

Present Value Factor

Discounted Cash Flows

0

(500,000)

1.0000 (500,000)

1

200,000 0.9091 181,818

2

150,000 0.8264 123,967

3

150,000 0.7513 112,697

4

50,000 0.6830 34,151

5

25,000 0.6209 15,523

6

25,000 0.5645 14,112

NPV

(16,120)

(17,732)

 

 

 

 

Table 5: NPV Evaluation of Big EZ Machine

Internal Rate of Return (IRR)

IRR

8%

NPV @ 9%

($7,209.19)

NPV @ 8%

$2,204.78

IRR

8%

 

 

Table 6: IRR Evaluation of Big EZ Machine

Alternative Proposal 3 - Cial Machine

Lambert has the final option to make investment of £ 500, 000 in Cial Machine. The firm will purchase it from Japan at a discount rate of 10%. Likewise, proposed investment is expected to generate relatively healthy cash stream for its life of six years (figure ...