Question 1 (28 marks)

Silicon Co. is a start-up company. It is now considering implementing one out of two mutually exclusive projects in the next month. The details about the two projects are as follows:

Project A The initial cost is $2,000,000. After that, the company can receive $700,000 each year from year 1 to year 3. The cash flow will drop to $200,000 in year 4.

Project B The initial cost is $2,200,000. The company can receive $400,000, $450,000, $500,000 and $1,800,000 from year 1 to 4 respectively.

Assume that the required return of Silicon Co. is 6%.

1. a) Calculate payback period of the two projects. Which project should the company choose? Explain your answer. (4 marks)

2. b) Suggest 2 reasons to explain why payback period may not be a good method to evaluate the two projects for Silicon Co. (6 marks)

3. c) Calculate discount payback period of the two projects. Which project should the company choose? Explain your answer. (7 marks)

4. d) Calculate the NPV of the two projects. Which project should the company choose? Explain your answer. (5 marks)

5. e) Instead of choosing one out of the two projects, Silicon Co. has just realized that they can implement projects A and B simultaneously if they install a new machine. The installation cost is $100,000. Explain whether Silicon Co. should install this new machine. (Hint: Justify your answer base on the NPV of the two projects.)

   (6 marks)