Question 4 (7 marks)

Healthy Food Ltd is considering to invest in one of the two following projects to buy new machinery. 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 7%. The cash flows of the projects are provided below.

	Machinery 1	Machinery 2
Cost	$396,000	$415,000
Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5	123,000 194,000 205,000 215,000 228,000	196, 000 204,000 212,000 217,000 233,000

Required:

(a) identify which option of machinery should the company accept based on NPV method (Note: Please round up the result of each calculation of PV to 2 decimal places only for simplification) (4 marks)

(b) Identify which option of machinery should the company accept based on the simple payback period method if the firm maintains a policy that every investment project should recover the initial investment within 2 years. (3 marks)