Arizona Company is considering an investment in new machinery. The annual incremental profits/(losses) relating to the investment are estimated to be:

$000

Year 1 (11)

Year 2 3

Year 3 34

Year 4 47

Year 5 8

Investment at the start of the project would be $175,000. The investment sum, assuming nil disposal value after five years, would be written off using the straight-line method. The depreciation has been included in the profit estimates above, which should be assumed to arise at each year end.

Required:

A Compute the net cash flow for each of the five years.

B. Calculate the net present value (NPV) of the investment at a discount rate of 10% per annum (the companys required rate of return)

Discount factors at 10% are:

Year 1 0.909

Year 2 0.826

Year 3 0.751

Year 4 0.683

Year 5 0.621

B. State, on the basis of your calculations above, whether the investment is worthwhile. Justify your statement.

C. With the use of the relevant techniques. explain two reasons for the significantly different outcomes when the discounting method and non-discounting method are used to evaluate a capital investment.