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QUESTION 4 [25 Marks] Metro Limited is planning a new project, which has an initial cost of $190 000. If the project runs for five
QUESTION 4 [25 Marks] Metro Limited is planning a new project, which has an initial cost of $190 000. If the project runs for five years the revenues and costs will be as follows: Year 1 2 3 4 5 Revenues 90 000 105 000 115 000 88 000 70 000 Costs 28 000 36 000 52 000 45 000 35 000 The directors have two options. Option A: To stop the project at the end of Year 3 when the scrap value of the project's assets will amount to $154 000. Option B: To continue with the project until the end of Year 5 when the scrap value of the assets will be $80 000. The company's cost of capital is 10%. Discount factors for this cost of capital are as follows: Year Discount Factor 1 0.909 2 0.826 3 0.751 4 0.683 5 0.621 Required (a) Calculate the net present value (NPV) of each option [14 Marks] (b) Advise the directors which option they should choose. Justify your answer. [2 marks] (c) Calculate the accounting rate of return (ARR) for Option A [5 Marks] (d) Why Metro Ltd chose to use Net Present Value as a basis for its decision rather than the Payback Period? [4 Marks]
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