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In the Table below is information about two options that face the Alpha & Omega Company as it seeks to expand its operations. Note that

In the Table below is information about two options that face the Alpha & Omega Company as it seeks to expand its operations. Note that all cash flows are at the end of the year except for the initial costs.

Option 1

Option 2

Initial cost

$680,000

$720,000

Usage life

5 years

6 years

Salvage value at end of useful life

$20,000

$30,000

Cash flows (excluding salvage value):

Year 1

$140,000

$ 80,000

Year 2

$140,000

$180,000

Year 3

$140,000

$280,000

Year 4

$140,000

$380,000

Year 5

$140,000

$260,000

Year 6

$ -

$150,000

Depreciation method is straight line

Tax rate is

20%

20%

Companys cost of capital

12%

12%

Present value of $1.00

Rate per period

Periods

6%

12%

1

0.9434

0.8929

2

0.8900

0.7972

3

0.8396

0.7118

4

0.7921

0.6355

5

0.7473

0.5674

6

0.7050

0.5066

7

0.6651

0.4524

Present value of Ordinary Annuity of $1.00

Rate per period

Periods

6%

12%

1

0.9434

0.8929

2

1.8334

1.6900

3

2.6730

2.4018

4

3.4651

3.0373

5

4.2124

3.6048

6

4.9173

4.1114

7

5.5824

4.5638

1 Calculate the net present value for each option.

2 Calculate the payback period for each option

3. Based on the results in (a) and (b) what course of action would you recommend to the management of Alpha & Omega Company?

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