XYZ Company aims to construct a high-technology computer-based machinery system in order to increase the efficiency of i

[answerhappygod]

XYZ Company aims to construct a high-technology computer-based
machinery system in order to increase the efficiency of its
production. The company has 2 offers from 2 different technology
companies and can only choose one of them. The offers are as
following:
PearTech Co.: The new computer-based system requires an initial
investment of $900,000, but it will increase the company’s sales by
$500,000 a year for each of the next 4 years. Moreover, the system
also requires an annual operating cost, which is expected to be 50%
of its sales. The working capital requirement will be $40,000 at
the start of the project (t=0) and expected to decrease by $4,000
each year. Lastly, it is assumed that the new system will be
depreciated over 4 years to a salvage value of zero using
straight-line depreciation method.
PeachTech Co.: The new computer-based system requires an initial
investment of $1,000,000, but it will generate $700,000 of sales in
year 1 and sales are expected to decrease by $50,000 each year. In
addition, the system will cost $300,000 per year to operate. From
the start of the project (t=0) the working capital required in each
year is expected to be 5% of sales in the following year. Lastly,
the new system will be depreciated on a straight-line basis over
its 5-year life to a salvage value of $300,000.
a. If the tax rate is 40% what are the cash flows of these
projects in each year?
b. If the opportunity cost of capital is 10%, what are the NPVs
of these projects? Which project will you choose according to the
NPV criteria?
c. If you apply the payback period criteria, which project will
you choose?
d. If you apply the profitability index criteria, which project
will you choose?
e. Based on your answers in (b) through (d), which project will
you finally choose?