Harper MiningLtd is considering to launch a new product which will require the company to buy a new assemble for product. The company was offered two following options. Each optionwill last 4 years and have no salvage value at the end. The company's required rate of return for all investment projects is 5%. The cash flows of the projects are provided below.

OptionA OptionB

Cost $420,000 $460,000

Future Cash Flows

Year 1 120000 150000

Year 2 240000 160000

Year 3 125000 250000

Year 4 175000 180000

Required:

1. Identify which option of equipment should the company accept based on simple pay back method if the payback criterion is maximum 2 years? (2 marks)

ANSWER:

1. Identify which option should the company accept based on Net Present Value (NPV) method?(4 marks)

ANSWER:

1. If there is a conflict between simple payback method and NPV, which option the company should choose and why is it? (1 mark)