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This problem has been solved! See the answer The X123 Company’s expansion plan has been very fruitful in the past few years The return to shareholders has been averaging 8%

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This problem has been solved!

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The X123 Company’s expansion plan has been very fruitful in the past few years The return to shareholders has been averaging 8%. The Board of Directors believe the 8% growth rate would continue in future. X123 requires a cutoff payback of 3 years as an initial screen when selecting capital investment projects. The following 2 projects are under assessment for investment in the coming year. Cash flows from each of the project appear in the following table:

	Project 1: plant expansion	Project 2: new product Launch
	Cash inflows
Initial investment	($ 300,000)	($ 300,000)
Year-1	$ 90,000	$ 150,000
Year-2	$ 90,000	$ 120,000
Year-3	$ 90,000	$ 60,000
Year-4	$ 90,000	$ 60,000
Year-5	$ 90,000	$ 60,000
Year -6	$ 90,000	$ 60,000

 

Required:

1. Calculate payback period for each project.
2. Calculate NPV for each project
3. Recommend which project X123 should invest in with justifications for your recommendation

Discuss the weaknesses of the IRR and NPV as a method if investment analysis