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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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