MINICASE Flowton Products enjoys a steady demand for stainless steel infil involve calculating net present value, internal rate of return, and trators used in a number of chemical processes. Revenues from payback, and these measures are also shown in the table. the infiltrator division are $50 million a year and production costs As usual, Emily Balsam arrived early at Flowton’s head office. are $47.5 million. However, the 10 high-precision Munster stamp- She had never regretted joining Flowton. Everything about the ing machines that are used in the production process are coming place, from the mirror windows to the bell fountain in the atrium, to the end of their useful life. One possibility is simply to replace suggested a classy outfit. Ms. Balsam sighed happily and reached each existing machine with a new Munster. These machines would for the envelope at the top of her in-tray. It was an analysis from cost $800,000 each and would not involve any additional operat- the infiltrator division of the replacement options for the stamper ing costs. The alternative is to buy 10 centrally controlled Skilboro machines. Pinned to the paper was the summary table of cash flows stampers. Skilboros cost $1.25 million each, but compared to the and a note from the CFO, which read, “Emily, I have read through Munster, they would produce a total saving in operator and mate- 20 pages of excruciating detail and I still don’t know which of rial costs of $500,000 a year. Moreover, the Skilboro is sturdily these machines we should buy. The NPV calculation seems to indi- built and would last 10 years, compared with an estimated 7-year cate that the Skilboro is best, while IRR and payback suggest the life for the Munster. opposite. Would you take a look and tell me what we should do and Analysts in the infiltrator division have produced the accom why. You also might check that the calculations are OK.” panying summary table, which shows the forecast total cash Can you help Ms. Balsam by writing a memo to the CFO? You flows from the infiltrator business over the life of each machine. need to justify your solution and also to explain why some or all of Flowton’s standard procedures for appraising capital investments the measures in the summary table are inappropriate.
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MINICASE Flowton Products enjoys a steady demand for stainless steel infil involve calculating net present value, internal rate of return, and trators used in a number of chemical processes. Revenues