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The Dilemma at eUREKA.com Comparison of Capital

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The Dilemma at eUREKA.com Comparison of Capital

 

The Dilemma at eUREKA.com Comparison of Capital Budgeting Techniques

eUREKA.com is trying to decide between two alterntive machines. They are aware that they have several methods to evaluate and compare the alternatives.

They give the task of evaluating the two alternatives using different techniques to Tolga and Aisha. They work a day and invite the department for a meeting the next morning.

 

That morning all department members gather together to go over the problems from beginning to the end. Tolga and Aisha go aver their calculations step by step trying to explain to the members of the department the caveats of the methods and how they should be used if chosen as the decision making criteria. Thye put the slide with the following cash flows to the screen and ask for everyone to take a very careful look at the numbers.

Year Simtotech Valarium 350000 600000 650000

1. Calculate the Payback Period of each project. should make to show that the Payback Period is not appropriate in this case.

Calculate the Discounted Payback Period (DPP) using 10% as the discount rate. Should Tolga and Aisha ask the Department Head to use DPP as the deciding factor? Explain.

Calculate the two projects’ IRR. How should Tolga and Aisha convince the Department Head that the IRR measure could be misleading?

Construct the NPV profile graphic for the two projects and explain the relevance of the crossover point. How should Tolga and Aisha convince the Board that the NPV method is the way to go?

Explain what argument Tolga and Aisha 2. 4. S. Explain how Tolga and Aisha can show that the Modified Internal Rate of Return is the more realistic measure to use in the case of mutually exclusive projects. You may use 10% as the reinvestment rate.

6. Calculate the Profitability Index for each proposal. Can this measure help to solve the dilemma? Explain.
In looking over the documentation prepared for the two machines, it appears to you that the simtotech analysis has been somewhat more conservative in its revenue projections than the valarium team. What impact might this have on your analysis?
In looking over the documentation prepared for two machines, it appears to you that the simtotech technology would require extensive development before it could be implemented whereas the valarium technology is available “off-the-shelf.” What impact might this have on your analysis? 7. 8.

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