Giant Machinery Ltd is considering to invest in one of the two following Projects to buy a 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 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 simple pay back method if the payback criteria is maximum 2 years. c) Which project Giant Machinery should choose if two methods are in conflict.
Giant Machinery Ltd is considering to invest in one of the two following Projects to buy a new equipment. Each project will last 5 years and have no salvage value at the end. The company’s required rate of
| Project 1 | Project 2 | |
| Cost | $175,000 | $185,000 |
| Future Cash Flows | ||
|
Year 1 Year 5 |
76,000 55,000 |
87,000 57,000 |
Required:
a) Identify which project should the company accept based on 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 simple pay back method if the payback criteria is maximum 2 years.
c) Which project Giant Machinery should choose if two methods are in conflict.
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