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You are working as a finance manager for Fire Fox Transport Ltd. The company is considering to invest in one of the two following projects

You are working as a finance manager for Fire Fox Transport Ltd. The company is considering to invest in one of the two following projects to buy a new equipment for their storage which is expected to boost the companys revenue. Each equipment will last 5 years and have no salvage value at the end. The companys required rate of return for all investment projects is 9.5%. The cash flows of the projects are provided below.

Equipment 1

Equipment 2

Cost

$157,000

$182,000

Future Cash Flows

Year 1

Year 2

Year 3

Year 4

Year 5

67 000

82 000

78 000

64 000

56 000

83 000

94 000

80 000

77 000

73 000

Required:

  1. Identify which option of equipment should the company accept based on Net Present Value (NPV) method? (4 marks)
  2. Identify which option of equipment should the company accept based on discounted pay back method if the payback criterion is maximum 3 years? (3 marks)

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