Giant Machinery Ltd is considering investing in one of the two following Projects to buy new equipment. Each project will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 9%. The cash flows of the projects are provided below. Project 1 Project 2 Cost $175,000 $185,000 Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 76,000 83,000 67,000 65,000 55,000 87,000 78,000 69,000 65,000 57,000 Required: a) Identify which project should the company accept based on the NPV method. (Note: Please round up the result of each calculation of PV to 2 decimal places only for simplification) b) Identify which project should the company accept based on the simple payback method if the payback criteria is a maximum of 2 years. c) Which project Giant Machinery should choose if two methods are in conflict.
Giant Machinery Ltd is considering investing in one of the two following Projects to buy new
equipment. Each project will last 5 years and have no salvage value at the end. The company’s required
Project 1 Project 2
Cost $175,000 $185,000
Future Cash Flows
Year 1
Year 2
Year 3
Year 4
Year 5
76,000
83,000
67,000
65,000
55,000
87,000
78,000
69,000
65,000
57,000
Required:
a) Identify which project should the company accept based on the
NPV method.
(Note: Please round up the result of each calculation of PV to 2 decimal places only for simplification)
b) Identify which project should the company accept based on the simple payback method if the
payback criteria is a maximum of 2 years.
c) Which project Giant Machinery should choose if two methods are in conflict.
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