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:

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:

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

ANSWER:

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