The Allied Group is considering two investments. The firstinvestment involves a packaging machine, which can be used to package garmentsfor shipping orders to customers. The second possible investment would be amolding machine that would be used to mold the mannequin parts.
The first possible investment is the packaging machine,which will cost $14,000. The second investment, the molding machine, would cost$12,000. The expected cash flows for the two projects are given below and thecost of capital to the firm is 15%. Both machines will be unusable after fiveyears and have no salvage value.
The net cash flows for the two possible projects are givenin the following table:
Year Packaging Machine Molding Machine
0 ($14000) ($12,000)
1 4100 3200
2 3300 2800
3 2900 2800
4 2200 2200
5 1200 2200
Questions: Address all of the following questions in a briefbut thorough manner.
- Calculate each project's payback period.
- Calculate the NPV for each project.
- Calculate the IRR for each project.
- If the two projects are independent of each other, whichprojects, if any, should be selected? Explain why or why not.
- If the two projects are mutually exclusive, which project,if any, should be selected? Explain why.