Capital Budgeting and Project Evaluation

Case Study: Assume that your group is working in the Financial Department of a company that produces health care tools and equipment. Your company is considering two potential projects as follow:

Project 1: launching a new product of hearing aids. Your supplier offers you two options that have different cash outlay and generate different revenue but the same useful life of 5 years. The table below shows the estimated data available to the companys Management:

	Option A	Option B
Initial Investment	1,205,000	1,315,000
Annual Cash Flow
Year 1	290,000	315,000
Year 2	320,000	345,000
Year 3	360,000	356,000
Year 4	375,000	402,000
Year 5	480,000	540,000

Project 2: Buying a new assembly for wheelchair production. Your companies are offered two options that will generate the same revenue for the company each year. The table below shows the initial and annual costs for each option.

	Option A	Option B
Initial Investment	1,550,000	1,750,000
The annual cost, including fuel, maintaining, and other relevant expenses
Year 1	42,000	35,000
Year 2	42,000	35,000
Year 3	42,000	35,000
Year 3	42,000	35,000
Year 5		35,000

You are required to write a short report to the companys Management:

1) To select a relevant method among five investment criteria of Net Present Value (NPV), Equivalent Annual Cost (EAC), profitability Index (PI), Internal Rate of Return (IRR), Simple Payback Period, and Discounted Payback Period for each project, given the market required rate of return for all project is 9.5% and the companys benchmark of payback is maximum 3 years. Your recommendation must include your justification on why you choose the specific method based on its pros and cons compared to other methods. (Note: you cannot use the same method for both projects)

2) To perform the selected method and present the outcome of your project evaluation and recommend the option A or B should the company choose for each project. Your justification must include calculation steps and numerical outcomes.