Question 1 (20 marks)

K-Super is considering preparing one of its retail stores with either of two new cashierless systems system A or system B. To analyze these alternatives, Janice Yan, a financial analyst, prepared estimates of the initial investment and cash inflows associated with each system. These are shown in the following table.

Year	System A ($)	System B ($)
0	(4,250,000)	(3,000,000)
1	1,070,000	850,000
2	1,380,000	850,000
3	1,700,000	850,000
4	900,000	850,000
5	600,000	850,000

Note that Janice plans to analyze both systems over a 5-year period. At the end of that period, the systems would be sold. Janice believes that the two systems are equally risky and that the acceptance of either of them will not change the firms overall risk. She therefore decides to adopt the firms 10% cost of capital as the required rate of return. K-Super requires all projects to have a maximum payback period of 4 years.

(iv) Which system should be chosen if based on Profitability Index instead? Explain. (3 marks)

(v) Given the IRR of system A is 11.26% and IRR of system B is 12.86%, which system should be chosen? Explain. (2 marks)

(vi) Summarize the preferences indicated by the techniques used in parts (i) to (v).

Explain which system should be chosen?

(3 marks)