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EcoCurls has become a member of the Sustainable Hairdressers Organisation (SHO). As part of her planned expansion, owner-manager Zoe Princeton has been looking to purchase
EcoCurls has become a member of the Sustainable Hairdressers Organisation (SHO). As part of her planned expansion, owner-manager Zoe Princeton has been looking to purchase either a Stella water recycler or an Aqua water recycler that the SHO recommends. Both water recyclers are expected to have a five year life, with the Stella having a S10,000 residual value and the Aqua having a S7,000 residual value. EcoCurls required rate of return on investments is 8%. The estimated cash flows for the Stella and the Aqua water recyclers are shown in the table below (excludes any residual value): Option A: Stella Yer YearYear 2Year 3 Year 4 Year 5 Cash inflows savings Cash outlows95,00015,00015,000 15,000 -20,000-15,000 40,00050,000 55,000 55,000 45,000 Net cash flows95,000 25,000 35,000 40,000 35,000 30,000 Option B: Aqua Year 0Year 1 Year 2 Cash inflows savings Cash outflows Year 3 Year 4 Year 5 25,00035,000 40,000 40,000 40,000 70,000 -10,000-10,00010,00012,000-12,000 Net cash flows-70,00015,000 25,000 30,000 28,000 28,000 Required: (1) Calculate the payback period for options A and B (2) Calculate the Net Present Value (NPV) for options A and B. (Use the present value (2 marks) discount factors shown in the following Table and round your answer to two decimal places) (4 marks) (3) Based on your calculations, make a recommendation about which water recycler Zoe Princeton should purchase and explain why (4 marks)
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