A company is considering the following investment projects. Both would involve purchasing machinery with a life of 5 years.
· Project 1 would generate annual cash flows of £150,000; the machinery would cost £350,000 and have a scrap value of £45,000.
· Project 2 would generate annual cash flows of £250,000; the machinery would costs £800,000 and 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 initial outlay.
Calculate the net present value and payback for each project and state which project the company should accept and why.