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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.

  • What is each project’s payback period? Provide a detailed explanation of how you calculated the payback period for each.
  • What is the NPV for each project? Provide a detailed explanation of how you calculated the payback period for each.
  • What is the IRR for each project? Provide a detailed explanation of how you calculated the payback period for each.
  • If both of the projects can be selected, then should both be selected? Why or why not? Explain why or why not.
  • If the two projects are mutually exclusive, which project, if any, should be selected? Explain why.
 
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