New assets: comparison of approaches in capital budgeting. Panayiotis, the owner and Oo manager of Micos Ltd., is evaluating the acquisition of new equipment needed to attend a 9 piscount factor, new line of business. He has two alternatives: either buy two small machines or one large and 2 sai machines, 3.5460 more automatic machine:

REQUIRED 1. Determine the payback period in years. 2. Determine the present value of total recurring cash flows. 3. Determine the net present value of the project. 4. Do you estimate that the IRR of the project is higher or lower than 5%? 5. If both projects were independent, would you accept them?LO1

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Net initial investment to acquire the asset Useful life of the acquired asset Recurring cash inflow per year Buy 2 Small Machines $100,000 per machine 4 years both machines $ 70,000 Buy 1 Large Machine $250,000 5 years $ 70,000 Recurring cash outflow per year Required rate of return for both projects $ 5,000 per machine 5% $ 15,000