Is the Latest Technology Crane ALII Worth Buying - Essay Example

NPV NEW CRANE Year Purchase Price Running Costs Old Crane Sales Income Net Cash Flow Now -345,000 5000 -340,000 1 -60,000 40000 -20,000 2 -60,000 40000 -20,000 3 -60,000 40000 -20,000 4 -60,000 40000 -20,000 5 -60,000 40000 -20,000 6 -60,000 30,000 -30,000 7 -60,000 30,000 -30,000 8 -60,000 30,000 -30,000 9 -60,000 30,000 -30,000 10 -60,000 30,000 -30,000 ($13,677.21) Option B 1 -40,000 -40,000 - 0 -80,000 2 -40,000 0 -40,000 3 -40,000 0 -40,000 4 -40,000 0 -40,000 5 -125,000 -40,000 1000 0 -164,000 6 -60,000 30,000 -30,000 7 -60,000 30,000 -30,000 8 -60,000 30,000 -30,000 9 -60,000 30,000 -30,000 10 -60,000 30,000 -30,000 The second option looks more feasible given the current situation. Although both projects are yielding a negative NPV, but the second option is giving a smaller negative number, hence we can safely conclude that the company should wait for 5 more years before buying the latest technology crane ALII. NPV shows us that the project would yield more cash inflow than outflow, but the negative number shows us that the outflows would be greater than the inflow. The best option for the company is trying to increase its revenue base in order to improve the situation. Just having two or three projects supporting such a large purchase is not feasible and hence the company should market more often to attract more customers. In case these are two exhaustive options, the company should clearly select the option b because it is yielding a lower negative number and hence if the company wants to save its position it should try to adopt the option b. Money rates of returns do not reflect the time value of money. All economies face the phenomenon that the purchasing power of money constantly falls with the passage of time. Hence, inflation is needed to be taken into account in order to arrive at the real rate of return or rate of returns that are adjusted against inflation. The discounting factor of 23 percent has been adjust by multiplying it by 104 in order to arrive at the inflation adjusted discount rate to give better idea regarding the position of the company and how much it should earn in order to safeguard its position against falling value of a dollar due to inflation and alternative projects that are available to a company. This way the money return has been adjusted to real return and provides a better picture of how much return the company needs to earn on its projects to safeguard the value of its wealth in real terms and to make sure that it is not losing money. If a company does not pay heed to the time value of money it cannot tell whether it has made or lost money and hence it is considered one of the fundamental concepts of finance and needs to be taken into account every time the company needs to make an important decision. This will make sure that the company’s resources are being used for earning proper returns and not just money returns that are not adjusted against inflation. Given the scenario it can be said that there are several factors that should affect the viability of ALII. These include how much saving using a faster crane would be made. All the company’s processes would become more efficient and it would save some money, but the question does not speak about it and if all of this is taken into account, the project’s NPV would very well be positive. Other than that, there will be other factors like financing options, providing the financer with a collateral, impact of this purchase on the taxes for example, the company can use diminishing balance method and charge high depreciation rates to its balance sheet in order to get a saving in taxes. All of this should be taken into account and the company should also hire some good finance managers and should not rely on amateur finance people who do not know about the jack of the problem and their discussion is nothing but layman’s observation of the issue. Hence, the best thing for the company is to hire some specialist finance people who have better information than the current participants of the meeting who do not have sufficient financial knowledge to make proper and meritorious decisions for the company. Read More