Question 4

2. Antares Ltd is considering two investment options. The first option (Option A) involves an upgrade to an existing food-processing facility and the second option (Option B) is to build new food-processing facility. Antares can only undertake one of the two options and therefore, the management is evaluating which option it should choose. The cash flows for options A and B are as follows.

Option A	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Cash inflows		400,000	450,000	500,000	550,000	60,000
Cash outflows	-487,500	175,000	175,000	225,000	225,000	250,000
Option B
Cash inflows		612,500	575,000	500,000	450,000	40,000
Cash outflows	-500,000	250,000	225,000	200,000	175,000	150,000

[TASK] Determine the payback period for both options A and B

[4 marks]

3. Onyx Inc. has four potential projects to consider for investment in the next financial period. The following table summarises an appraisal of the projects using different analysis tools:

Project	Payback (Years)	NPV(10%)
A	4	-$610
B	3.5	+$2,430
C	3.8	+$3,610
D	4.2	+$4,790

[TASK]

1. Why was the payback technique inadequate on its own to assess the four projects?
2. Explain clearly what the +$2,430 Net Present Value (NPV) for project B means.
3. Both payback period and net present value techniques employ cash flows forecast in their analyses. Why do you think that cash flow forecasts are used rather than profit forecasts to assess the viability of the proposed projects? Explain your answer.
4. Explain two non-financial factors that Onyx needs to consider before deciding to approve an investment with a positive NPV.

[17 marks]