d 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 company’s 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
ealthy 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 company’s required rate of
|
|
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:
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.
Simple paybck period is the number of years required to recover the initial amount of investment and it consider the only cash flow upto initial investment.
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