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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 76,000 87,000
Year 2 83,000 78,000
Year 3 67,000 69,000
Year 4 65,000 65,000
Year 5 55,000 57,000
Required:
Question a) Identify which project should the company accept based on NPV method.
Question b) Identify which project should the company accept based on simple pay back method if the payback criteria is maximum 2 years.
Question c) Which project Giant Machinery should choose if two methods are in conflict.
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