Question 1 A

Lake Inc is faced with several investment opportunities. The projects are mutually exclusive, and he is faced with limited capital. Consider the following cash flows relating to the projects:

Year Machine A Machine B

0 $ (120 000) $ (105 000)

1 40 000 30 000

2 50 000 45 000

3 35 000 30 000

4 42 000 25 000

5 20 000 20 000

The projects cost of capital is 12%.

A. As a financial analyst you have been asked to perform the following task:

i. Calculate the projects payback period. (2 marks)

ii. Calculate the projects Net Present Value (NPV) (12 marks)

iii. Make a recommendation as to which project should be undertaken and why?

(2 marks)