You are working as a finance manager for Fire Fox Transport Ltd. The company is considering to invest in one of the two following projects to buy a new equipment for their storage which is expected to boost the company’s revenue. Each equipment will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 9.5%. The cash flows of the projects are provided below.
| Equipment 1 | Equipment 2 | |
| Cost | $157,000 | $182,000 |
| Future Cash Flows
Year 1 Year 2 Year 3 Year 4 Year 5 |
67 000 82 000 78 000 64 000 56 000 |
83 000 94 000 80 000 77 000 73 000 |
Required:
- Identify which option of equipment should the company accept based on Net Present Value (NPV) method?
- Identify which option of equipment should the company accept based on discounted pay back method if the payback criterion is maximum 3 years?
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