A company considers the following investment projects. Both projects involve the purchase of machinery with a life span of five (5) years.
- Project A would generate annual cash flows of $150,000; the machinery would cost $350,000 and have a scrap value of $45,000.
- Project B would generate annual cash flows of $250,000; the machinery would cost $800,000 and would have a scrap value of $350,000.
The company's discount rate is 12%. Assume that the annual cash flows arise on the anniversaries of the date of purchase.
Calculate the net present value and payback for each project and state which project the company should accept and why.