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Discuss the important elements to consider

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Contact Manufacturing Ltd is considering two alternative investment proposals. The first proposal calls for a major renovation of the company's manufacturing facility. The second involves replacing just a few obsolete pieces of equipment in the facility. The company will choose one project or the other this year, but it will not do both. The cash flows associated with each project appear below and the firm discounts project cash flows at 15%. Year Renovate Replace 0 -$9,000,000 -$2,400,000 1 3,000,000 2,000,000 2 3,000,000 800,000 3 3,000,000 200,000 4 3,000,000 200,000 5 3,000,000 200,000

Calculate:

Question 1: Based on this NPV profile analysis and assuming the WACC is 25%, which project is recommended? Why?

Question 2: Discuss the important elements to consider when deciding between these two projects.

Reference no: EM132533917

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