HI5002 FINANCE FOR BUSINESS

Question 3 (7 marks)

You are working as a finance manager for Fire Fox Transport Ltd. The company is considering to invest in one of the two following projects to buy a new equipment for their storage which is expected to boost the companys revenue. Each equipment will last 5 years and have no salvage value at the end. The companys required rate of return for all investment projects is 9.5%. The cash flows of the projects are provided below.

	Equipment 1	Equipment 2
Cost	$157,000	$182,000
Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5	67 000 82 000 78 000 64 000 56 000	83 000 94 000 80 000 77 000 73 000

Required:

a) Identify which option of equipment should the company accept based on Net Present Value (NPV) method? (4 marks)

b) Identify which option of equipment should the company accept based on discounted pay back method if the payback criterion is maximum of 3 years? (3 marks)