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Question 1 (30 marks) Happy Manufacturing Co. is considering preparing to invest in the robots and cobots, integrating automation into its production Project A or
Question 1 (30 marks) Happy Manufacturing Co. is considering preparing to invest in the robots and cobots, integrating automation into its production Project A or Project B. To analyze these alternatives, Peter Chow, a financial analyst, prepared estimates of the initial investment and cash inflows associated with each project. These are shown in the following table. Year Project A ($) Project B ($) 0 (1,150,000) (900,000) 1 386,000 250,000 2 334,000 250,000 3 312,000 250,000 4 275,000 250,000 5 240,000 300,000 Note that Peter plans to analyze both projects over a 5-year period. Peter believes that the two projects are equally risky and that the acceptance of either of them will not change the firms overall risk. He therefore decides to adopt the firms 11% cost of capital as the required rate of return. Happy Manufacturing Co. requires all projects to have a maximum payback period of 4 years. (i) Use the payback period to determine which project should be chosen. Explain. (6 marks) (ii) Use the discount payback period to determine which project should be chosen. Explain. (7 marks) (iii) Use NPV to determine which project should be chosen. Explain. (8 marks) (iv) Which project should be chosen if based on Profitability Index instead? Explain. (4 marks) (v) Summarize the preferences indicated by the techniques used in parts (i) to (iv). Explain which project should be chosen? (5 marks)
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