Managers in a variety of design and technical divisions are concerned that a project of this magnitude will strain resources available to other projects. As manager of technology acquisition, you have been invited to share a summary of major issues involved in a decision to adopt new technology of this nature, at a financial level, with key management peers. You understand that this may be challenging because your audience is non-financial, and so you plan to outline central financial issues involved in this decision to adopt a Knyttan, in partnership with Unmade. Jon Smedley’s chief executive officer has agreed to this approach, and has instructed you, as manager of technology acquisition at Jon Smedley, to determine whether the project will be acceptable should interest rates increase as expected, and financing for the Knyttan device will consist of debt, on which the firm will be charged a market rate of interest. Assume that you have prepared the summaries of financial data included below, using an interest rate of 8% (Tables 1 and 2). Table 3 summarizes the results.
A) At interest rates of 8% and 18%, analyze project finances using Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Criteria as these may be used to determine the acceptability of the proposed project, under the assumption that the project is standalone and will not draw resources from other areas of the firm. Include analysis of all components of project cash flow.
B) Recalling that (EBIT + Depreciation – Interest – Taxes) = Operating Cash Flow, evaluate the role of net working capital, depreciation and taxation in determining project cash flows.
