Question 4

1. Orionis Ltd is obligated to restore a leased land to its original condition after its oil drilling activities are over in four years. The cash flow for the restoration costs in four years are as follows:

Year	Cash flow required
1	$400,000
2	$120,000
3	$120,000
4	$50,000

The company's interest rate is 6%.

[TASK] Determine the net present value of the restoration costs.

[4 marks]

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]