Capital Budgeting :

Contact Manufacturing Ltd is considering two alternative investment proposals. The first proposal calls for a major renovation of the companys manufacturing facility. The second involves replacing just a few obsolete pieces of equipment in the facility. The company will choose one project or the other this year, but it will not do both. The cash flows associated with each project appear below and the firm discounts project cash flows at 15%.

Year Renovate Replace

0 -$9,000,000 -$2,400,000

1 3,000,000 2,000,000

2 3,000,000 800,000

3 3,000,000 200,000

4 3,000,000 200,000

5 3,000,000 200,000

1. Calculate the payback period of each project and based on this criterion, indicate which project you would recommend for acceptance.

2. Calculate the net present value (NPV) of each project and based on this criterion, indicate which project you would recommend for acceptance.