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Healthy Food Ltd is considering to invest in one of the two following projects to buy new machinery. Each option will last 5 years and
Healthy Food Ltd is considering to invest in one of the two following projects to buy new machinery. Each option will last 5 years and have no salvage value at the end. The companys required rate of return for all investment projects is 7%. The cash flows of the projects are provided below.
Machinery 1 | Machinery 2 | |
Cost | $396,000 | $415,000 |
Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 |
123,000 194,000 205,000 215,000 228,000 |
196, 000 204,000 212,000 217,000 233,000 |
Required:
a) Identify which option of machinery should the company accept based on NPV method (Note: Please round up the result of each calculation of PV to 2 decimal places only for simplification) (4 marks)
ANSWER a):
b) Identify which option of machinery should the company accept based on the simple payback period method if the firm maintains a policy that every investment project should recover the initial investment within 2 years. (3 marks)
ANSWER: b)
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