Question 6

Smart Company has $750,000 to invest and is trying to decide between two alternatives. The company uses a discount rate of 20%. Income tax is ignored. The details are as below:

Project A

Project B

Cost of the equipment

$750,000

0

Working capital investment, to be released after 7 years

0

$750,000

Annual cash inflows

$210,000

$150,000

Salvage value of the equipment

$50,000

0

Life of project

7 years

7 years

Required:

Which investment project would you recommend to Smart company? (15 marks)