=+◗ Option 3. The facility could be used to make specialty frozen yoghurts. Fixed overhead costs (a cash outflow) are estimated to be $9000 annually for the five-year period. The frozen yoghurt will sell for $3.75 per litre. Variable cost per unit is expected to be $2.95 per litre. The following production and sales of frozen yoghurt are expected: 2016, 75000 litres; 2017, 95000 litres; 2018, 56000 litres; 2019, 32000 litres; and 2020, 50000 litres. In order to manufacture the frozen yoghurts, some additional equipment would need to be purchased at an immediate cost of $125000. The equipment would be depreciated using the straight-line depreciation method and zero terminal disposal value over the five years it would be in use. Because of the equipment upgrades, Maleny Dairy Foods could sell the facility for $190000 at the end of five years. An additional investment of $25000 in inventories (working capital) is necessary, and this would be recovered in the final year.

Maleny Dairy Foods treats all cash flows as if they occur at the end of the year, and it uses an after-tax required rate of return of 14%. Maleny Dairy Foods is subject to a 30% tax rate on all income, including capital gains.

Required 1 Calculate net present value of each of the options and determine which option Maleny Dairy Foods should select using the NPV criterion.