Fazio Pump Corporation

Abstract:     
SUBJECT AREAS: Capital budgeting; setting up cash flows with inflation, MACRS, and terminal value; payback internal rate of return; and net present value.

CASE SETTING: 1995, USA, machinery company.

This case involves setting up cash flows for determining the payback, internal rate of return and net present value for an investment project. There is an inflation assumption for the cash flows, which introduces the issue of whether it is consistent with the inflation premium embraced in the required rate of return. Modified accelerated cost recovery (MACRS) is used for depreciation, and this affects the timing of after-tax cash flows.

JEL Classification: G31

Case and Teaching Paper Series