bank2007 business finance

Ex-C Avery and Avery Ltd. produces glow in the dark designer sunglasses for the hip and trendy. Due to the increasing demand for their sunglasses Avery and Avery are looking to expand production. They have investigated two different options for this purpose. The first option costs $500,000 and has a life of 7 years, while the second option costs $1,000,000 and has a life of only 4 years. Neither has any salvage value at the end of their lives. Avery and Avery's cost of capital is estimated at 10%.

The expected after tax cash ows associated with the 2 projects are as follows: Year 1 2 3 4 5 6 7 Option 1 $150,000 $140,000 $130,000 $120,000 $110,000 $100,000 $90,000 Option 2 $350,000 $3 50,000 $350,000 $350,000 Which option should Avery and Avery choose? Hint: You have a problem with unequal lives you cannot simply use NPV. If the cost of capital is 12% do you obtain the same recommendations? You can attempt this in excel after completing the part of the question on paper (on your calculator). Optional: What is the decision if the cost of capital is 14%