Question
S ilicon Co. is a start-up company. It is now considering going ahead with one of the following projects next month. The details about the
S ilicon Co. is a start-up company. It is now considering going ahead with one of the following projects next month. The details about the two projects are as follows: Project A The initial cost is $1,500,000. In return, the company forecast year-end cash inflow of $600,000 from year 1 to year 3. The cash flow will drop to $400,000 in year 4. Project B The initial cost is $1,800,000. The company forecasts to receive $500,000, $550,000, $400,000 and $1,200,000 from year 1 to 4 respectively. Assume that the required yearly return of both projects are 5% a)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 $200,000. Explain whether Silicon Co. should install this new machine. (Hint: Justify your answer base on the NPV of the two projects.)
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