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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
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 companys 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 Year 2 Year 3 Year 4
|
120 000 240 000 125 000 175 000
|
150 000 160 000 250 000 180 000
|
Required:
- 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:
- Identify which option should the company accept based on Net Present Value (NPV) method?(4 marks)
ANSWER:
- If there is a conflict between simple payback method and NPV, which option the company should choose and why is it? (1 mark)
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