SECTION A: COMPULSORY QUESTION Question 1 The directors of Futura Industries are currently considering launching a new product The company has 2 products that it is currently evaluating. The production of both products will require purchase of new machinery. The following information is available for each project: Product 1 160,000 250,000 Expected Net Cash flow Year 1 Expected Net Cash flow Year 2 Expected Net Cash flow Year 3 Cost (Immediate Outlay Residual/Scrap Value 275.000 300 000 45,000 Product 2 Probabilities 0.15 Net Cash Flow Year 1 145,000 Net Cash Flow Year 2 217,500 0.3 0.15 0.4 40,000 60,000 125.000 60,000 90,000 187.500 54,000 81.000 168.750 215.000 52.000 Net Cash Flow Year 3 195,750 Cost (Immediate Outlay) Residual/Scrap Value The company has an estimated cost of capital of 15% and employs the straight-line method of depreciation for all fixed assets. Neither project would increase the working capital of the company. The company has sufficient funds to meet all capital expenditure requirements. Required: a) Calculate the expected net cash flow for each year of the life of product 2. (10 marks) b) Calculate for each product: The net present value (14 marks) The payback period (8 marks) c) State which, if any, of the two products should the directors of Futura Industries decide to produce, and why. (8 marks)