Healthy Food Ltd is considering to invest in one of the two following projects to...
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Accounting
Healthy Food Ltd is considering to invest in one of the two following projects to buy new machinery. Each option will last 5 years and have no salvage value at the end. The companys required rate of return for all investment projects is 7%. The cash flows of the projects are provided below.
Machinery 1
Machinery 2
Cost
$396,000
$415,000
Future Cash Flows
Year 1
Year 2
Year 3
Year 4
Year 5
123,000
194,000
205,000
215,000
228,000
196, 000
204,000
212,000
217,000
233,000
Required:
a) Identify which option of machinery 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)(4 marks)
ANSWER a):
b) Identify which option of machinery should the company accept based on the simple payback period method if the firm maintains a policy that every investment project should recover the initial investment within 2 years.(3 marks)
ANSWER: b)
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