Question
New Age Ltd is considering investing in one of the two following projects to buy a new assembly line. Each option will last 5 years
New Age Ltd is considering investing in one of the two following projects to buy a new assembly line. 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 9%. The cash flows of the projects are provided below. Assembly Line 1 Assembly Line 2 Cost $386,000 $425,000 Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 136 000 213 000 283 000 215 000 175 000 197 000 184 000 186 000 265 000 263 000
Required: a) Identify which option of assembly line the company should accept based on the NPV method (4 marks) (Note: Please round up the result of each calculation of PV to 2 decimal places only for simplification)
b) Identify which option of assembly line the company should accept based on the Profitability Index method (3 marks).
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