Solution-Should use payback period in your investment

Should use payback period in your investment decision

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Reference no: EM132997820

You are considering the following two mutually exclusive projects.

Project 1: Cash Flow in Year 1: $21,500, Year 2: $13,500, Year 3: $10,000. For this project 1, you need to buy a machine in the beginning (Year 0) for $36,000 and you can sell it for $3,500 at the end of its useful life in Year 3.

Project 2: Cash Flow in Year 1: $13,690, Year 2: $11,500, Year 3: $25,300. For this project 2, you need to buy a machine in the beginning (Year 0) for $36,000 but there is no salvage value at the end of its useful life in Year 3.

For each project, you require 10% rate of return. And you have a limited investment capital of $36,000.

Problem 1: Calculate NPV and IRR of each project. Should you invest in one of the two projects? If yes, which one and why?

Problem 2: What is the payback period for each project? Should you use payback period in your investment decision? Why or Why not?

Reference no: EM132997820

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Should use payback period in your investment decision

Reference no: EM132997820

Reference no: EM132997820

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