Text: Question 4 (7 marks)
Healthy Food Ltd is considering investing 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 company's required rate of return for all investment projects is 7%. The cash flows of the projects are provided below.
Machinery 1
Cost: $396,000
Future Cash Flows:
Year 1: $123,000
Year 2: $194,000
Year 3: $205,000
Year 4: $215,000
Year 5: $228,000
Machinery 2
Cost: $415,000
Future Cash Flows:
Year 1: $196,000
Year 2: $204,000
Year 3: $212,000
Year 4: $217,000
Year 5: $233,000
Required:
(a) Identify which option of machinery the company should accept based on the NPV method (Note: Please round up the result of each calculation of PV to 2 decimal places only for simplification) (4 marks)
(b) Identify which option of machinery the company should 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)