Anthony's Orchard Case Study Solution

Investment Analysis

Based on the financial data made available by the management of Anthony’s Orchard, there would be a series of analysis using various methods to determine the viability of the proposed purchase of the Apple Press Machine. The methods are;

1. Accounting Rate of Return (ARR)
2. Payback Period (PP).
3. Net Present Value (NPV)
4. Internal Rate of Return (IRR)

The following estimates were made;
a. The machine has no residual value
b. The estimated cash flow is $90,000 per year
c. The estimated income from the apple press is $95,000 per year
d. The cost of Apple press is $950,0000
e. The Apple press has a 7 years life span
f. Anthony Orchard uses 8% as cost of capital
g. Company require a minimum of 10% return on investment from

Now economic implication of this negative NPV is that the machine does not have a high cash flow for the number of years of usage to yield profit. In this case, the amount of outflow is for the investment is more that the cash inflows. But this method is however a perfect representation of the viability of the Apple press as it considers the time vale of money and the increment of investors wealth.

Internal Rate of Return (IRR)
The Internal rate of return (IRR) of a specific venture is the rebate rate that, when connected to its future money flows, will deliver a NPV of exactly zero.

Time Cash Flow
$ Cumulative PV 8%
$ PV
$ Cumulative PV
$ 0.001% PV
$
Immediately (950,000) 1 (950,000) 1 (950,000)
Year 1 90,000 0.925 83,333 0.999 89,991
Year 2 90,000 0.854 76,923 0.999 89,982
Year 3 90,000 0.793 71,429 0.999 89,973
Year 4 90,000 0.735 66,176 0.999