Answered: Giant Machinery Ltd is considering…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 16P: Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of...

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Question

Giant Machinery Ltd is considering investing in one of the two following Projects to buy 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
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
Required:
a) Identify which project should the company accept based on the

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 the simple payback method if the
payback criteria is a maximum of 2 years.
c) Which project Giant Machinery should choose if two methods are in conflict.

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