After extensive medical and marketing research, Mega plc believes it can penetrate

the pain reliever market. It is considering two alternative products. The first is a

medication for headache pain. The second is a pill for headache and arthritis pain.

Both products would be introduced at a price of $4$ per package. The headache$-$only

medication is projected to sell $5$ million packages a year, whereas the headache and

arthritis remedy would sell $20$ million packages a year. Cash costs of production are

expected to be $1\mathrm{.}50$ per package for the headache$-$only brand. Production costs are

expected to be $1\mathrm{.}70$ for the headache and arthritis pill. Both products requires

further investment. The headache$-$only pill could be produced using equipment

costing $10\mathrm{.}2$ million. That equipment would last three years and have no resale

value. The machinery required to produce the headache$-$arthritis remedy would cost

$20$ million and last three years. The firm expects that equipment to have a $2$ million

resale value at the end of year $3.$ Mega plc uses reducing balance $(20$ per cent$)$

depreciation and believe that the appropriate discount rate for this investment is

$13\%.$ The firm faces a corporate tax rate of $24\%.$

Requirements:

Discuss which capital appraisal technique is more suitable to evaluate both

the projects? Ensure you provide a discussion relevant to this case. $($No

calculation required in this part$)$

Use appropriate capital appraisal technique$($s$)$ to evaluate the projects and

suggest to the company which project should be undertaken if the objective is

to maximise shareholders' wealth.