Giant Machinery Ltd is considering to invest 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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A:

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Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.