The Jordan Company has the opportunity to invest in new production line equipment, which would have a working lifetime of 10 years. The new equipment would generate the following increases in Jordan's net cash flows. (1) In the first year of usage the new plant would decrease costs by $200,000. (2) For the following six years, the cost saving would fall at a rate of 5 per cent per annum. In the remaining years of the equipment's lifetime, the annual cost saving would be $140,000. Assuming that the cost of the equipment is $1,000,000 and that Jordan's cost of capital is 10 per cent, calculate the NPV of the project. Should Jordan take on the Investment?
Describe two methods of project evaluation other than NPV. Discuss the weaknesses of these methods when compared to NPV.