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 175000 185000 future cash flows year 1 76000 87000 year 2 83000 78000 year 3 67000 69000 year 4 65000 65000 year 5 55000 57000 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 return for all investment projects is 9%. The cash flows of the projects are provided below. project 1 project 2 cost 175000 185000 future cash flows year 1 76000 87000 year 2 83000 78000 year 3 67000 69000 year 4 65000 65000 year 5 55000 57000 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.
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 22E
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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 | 175000 | 185000 |
| future cash flows | ||
| year 1 | 76000 | 87000 |
| year 2 | 83000 | 78000 |
| year 3 | 67000 | 69000 |
| year 4 | 65000 | 65000 |
| year 5 | 55000 | 57000 |
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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