New Age Ltd is considering investing in one of the two following projects to buy a new assembly line. 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 9%. The cash flows of the projects are provided below.     Assembly Line 1 Assembly Line 2 Cost $386,000 $425,000 Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5   136 000 213 000 283 000 215 000 175 000   197 000 184 000 186 000 265 000 263 000   Required: Identify which option of assembly line the company should accept based on the NPV method (Note: Please round up the result of each calculation of PV to 2 decimal places only for simplification) Identify which option of assembly line the company should accept based on the Profitability Index method.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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New Age Ltd is considering investing in one of the two following projects to buy a new assembly line. 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 9%. The cash flows of the projects are provided below.

 

 

Assembly Line 1

Assembly Line 2

Cost

$386,000

$425,000

Future Cash Flows

Year 1

Year 2

Year 3

Year 4

Year 5

 

136 000

213 000

283 000

215 000

175 000

 

197 000

184 000

186 000

265 000

263 000

 

Required:

  1. Identify which option of assembly line the company should accept based on the NPV method (Note: Please round up the result of each calculation of PV to 2 decimal places only for simplification)
  2. Identify which option of assembly line the company should accept based on the Profitability Index method.
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