A company is considering two projects, Project X or Project Y, to expand production capacity for a popular consumer product. Project X involves acquiring a similar existing machine for $135,000, while Project Y is a more expensive $240,000 machine with greater capacity. The Chief Accountant calculated the net present value, profitability index, and discounted payback period for each project but remains uncertain which to recommend. The assistant is asked to perform the same calculations and discuss their relevance to the decision.

1. A company is manufacturing a consumer product, the demand for which at current price is in excess of its
ability toproduce. The capacity of a particular machine, now due for replacement, is the limiting factor on
production. Thepossibilities exist either of acquiring a similar machine (Project X) or of purchasing a
more expensive machine withgreater capacity (Project Y). The cash flows under each alternative have
been estimated and given below. Thecompany’s opportunity cost of capital is 16%, after tax. In deciding
between the two alternatives the ManagingDirector favors the ‘pay back method’. The Chief Accountant,
however, thinks that a more specific method shouldbe used and he has calculated for each project
:i)The Net Present Value
ii)The Profitability Index
iii)The Discounted Pay Back Period
Having made these calculations, however,he finds himself still uncertain about which project to
recommended.You are required to make these calculations and to discuss their relevance to the decision
to be taken. The relevantcashflows are:
Year Project X Project Y
0 135000 240000
1 … 60000
2 30000 84000
3 132000 96000
4 84000 102000
5 84000 90000