Linden Mills has been successfully grinding wheat into flour for the past 100 years. Lately their markets have been shrinking due to the consumers move to healthier flour alternatives. Stewart Dillon, current mill manager, is looking for ways to capture this new market and wants to add a separate grinding machine to use in making oat, rice, and amaranth flours - flours that can be marketed to consumers as both gluten and nut-free.

Blake McDonald, the mills new financial analyst evaluates this capital budgeting decision using the net present value method. When he meets with Stewart to discuss his results, Stewart doesnt understand Blakes recommendation to purchase the grinding machine. Stewart evaluated the purchase himself using the payback method, the mills traditional method for capital budgeting decisions, and found that the purchase of a new grinding machine should not be made.

Explain why the payback period and net present value method may give different results. Define time value of money and net present value. Which method would be best for Linden Mills to use? Why?