Diggers is a coal mining company. Diggers has planned to invest in replacement equipment. Its existing equipment has come to the end of its useful life and will be scrapped with no resale value. The cost of the new replacement investment is $2 500 000. It is to be depreciated (straight-line basis) over a period of 10 years with no residual value. The discount rate is 8 per cent. The company tax rate is 30 per cent. The other relevant cash flow information relating to this project is presented in the following table.

Year ................................ Net cash inflow
1 ........................................ $ 500 000
2 ........................................ $ 800 000
3 ........................................ $1 200 000
4 ........................................ $2 000 000
5 ........................................ $2 400 000
6 ........................................ $3 000 000
7 ........................................ $2 600 000
8 ........................................ $2 400 000
9 ........................................ $1 200 000
10 ....................................... $ 400 000

The management team have also considered moving to clean coal technology to help improve the image of the company around issues of sustainability and stakeholders’ environmental concerns. While the net present value (NPV) of the alternative clean coal technology option has been calculated as $2 million, the management accountant is concerned that not all factors have been included in the calculation. There is difficulty in capturing some qualitative non-financial factors and estimating other longer-term cash flows.

Required

(a) Calculate the NPV for the proposed investment.

(b) In your opinion, which investment should the coal mining company make (replacement or clean coal technology)? Discussion should include reference to the financial and non-financial factors that may influence this decision and suggestions to improve the decision model.