Panayiotis, the owner and manager of Micos Ltd., is evaluating the acquisition of new equipment needed to attend a new line of business. He has two alternatives: either buy two small machines or one large and more automatic machine:
Required: 1. Determine the payback period in years. 2. Determine the net present value of each project. 3. Do you estimate that the IRR of the project is higher or lower than 5%? 4. If both projects were independent, would you accept them?
Buy 2 Small Machines Buy 1 Large Machine Net initial investment to acquire the asset $120,000 per machine $250,000 Useful life of the acquired asset 4 years both machines 5 years $ 80,000 $ 5,000 per machine $ 80,000 $ 15,000 Recurring cash inflow per year Recurring cash outflow per year Required rate of return 5% 5%