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Assume that your group is working in the Financial Department of a GE Healthcare company that produces health care tools and equipment. This company is considering two potential projects as follow:

Project 1: launching a new product of hearing aids. Your supplier offers you two options that have different cash outlay and generate different revenue but the same useful life of 5 years. The table below shows the estimated data available to the companys Management:

Option A

Option B

Initial Investment

A. 1,205,000

B. 1,315,000

Annual Cash Flow

Year 1

A. 290,000

B. 315,000

Year 2

A. 320,000

B. 345,000

Year 3

A. 360,000

B. 356,000

Year 4

A. 375,000

B. 402,000

Year 5

A. 480,000

B. 540,000

Project 2: Buying a new assembly for wheelchair production. Your company is offered two options that will generate the same revenue for each year. The table below shows the initial and annual costs for each option.

Option A

Option B

Initial Investment

A. 1,550,000

B. 1,750,000

The annual cost, including fuel, maintaining, and other relevant expenses

Year 1

A. 42,000

B. 35,000

Year 2

A. 42,000

B. 35,000

Year 3

A. 42,000

B. 35,000

Year 3

A. 42,000

B. 35,000

Year 5

B. 35,000

You are required to write a short report to the GE Healthcare companys Management:

1. Please select a relevant one method for Project A and B respectively among five investment criteria of Net Present Value (NPV), Equivalent Annual Cost (EAC), profitability Index (PI), Internal Rate of Return (IRR), Simple Payback Period, and Discounted Payback Period, given the market required rate of return for all project is 9.5% and the companys benchmark of payback is maximum 3 years.

Your recommendation must include your justification on why you choose the specific method based on its pros and cons compared to other methods. (Note: you cannot use the same method for both projects)

2) To perform the selected method and present the outcome of your project evaluation and recommend the option A or B should the company choose for each project. Your justification must include calculation steps and numerical outcomes.

3) Explain Risk and Rates of Return, does it related? Please share your thoughts about the same.

4) What are some of the challenges associated with relevant and irrelevant risk?

5) What are the factors that affects the Proforma Budgeting process, and how can the GE Healthcare leaders mitigate it? Please share your thoughts.

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