Question
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 | 123,000 | 196,000 |
| Year 2 | 194,000 | 204,000 |
| Year 3 | 205,000 | 212,000 |
| Year 4 | 215,000 | 217,000 |
| Year 5 | 228,000 | 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)
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.
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