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Norwich Memorandum

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Submitted By marybarraza10
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Memorandum

TO: Senior Management
FROM: Mario Jackson
DATE: February 13, 2013
RE: Lathe A and B

A review of lathes A and B was made for the Norwich Tool Company. This analysis was conducted by Mr. Mario Jackson, to determine the incremental benefits between lathe A and B. After closely analyzing the data from lathe A and lathe B it has been determined that Lathe B should be chosen for this project. Lathe B has a comparative advantage over lathe A due to the fact that it has a payback of 3.65 years and Lathe A has a has a payback of 4.04 years. In the long run it is a faster payoff.
After doing an overview of the net present value is 58,132.88 for lathe A and an Internal Rate of Return of 15.95 percent. Lathe B has a net present value of 43,483.24 and an Internal Rate of Return of 17.34. Both options offer a Net present value greater than zero, which means they are both acceptable. The Internal Rate of Return for both Lathes is greater than 13% which is the minimum required expectation for Norwich Tool Company. The option of lathe B continues to be the better choice. The rankings in the two options are not conflicting since there is still an advantage of Lathe B over Lathe A. Both options are Greater than zero for the net present value and the Internal Rate of Return is greater than 13 percent, yet the investment for lathe B is less than lathe A, which indicates that the risk of return trade off again makes lathe B the top prospect since it has a comparative advantage.
After drawing the net present value for lathe A and lathe B in the same axes it is determined that due to time and the internal rate of return Lathe B continues to be the option this analyst will be selecting.

If Norwich Tool Company wants to continue to have the highest profit possible and considering the time value of money and the fastest rate possible the wiser choice

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