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 $185,000Required:a) Identify which project should the company accept based on NPV method. 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. Future Cash Flows Year 1Year 2Year 3Year 4 Year 5 76,000 83,000 67,000 65,000 55,000 87,000 78,000 69,000 65,000 57,000

a. ------------------------------------------ Project 1: NPV $98,114.37 Project 2: NPV $96,841.94…

Answered: Giant Machinery Ltd is considering to…

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

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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

Required:

a) Identify which project should the company accept based on NPV method.
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.

Future Cash Flows Year 1

Year 2

Year 3

Year 4 Year 5

76,000 83,000 67,000 65,000 55,000

87,000 78,000 69,000 65,000 57,000

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