The Allied Group is considering two investments. The first investment involves a packaging machine, which can be used to package garments for shipping orders to customers. The second possible investment would be a molding 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 the cost of capital to the firm is 15%. Both machines will be unusable after five years and have no salvage value.
The net cash flows for the two possible projects are given in 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 brief but 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, which projects, 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.