The management of Kenjo Ltd is evaluating two investment options.

Option One is to purchase a Japan-made production machine at the cost of 145,000. The additional net cash operating inflow due to this investment will be 62,000 in the first year, 65,000 in the second and 72,000 in the third year.

Due to the expertise required to operate this machine, they will need to hire a new specialist supervisor at a cost of 10,000 per year. They have included this cost in the above net operating cash flow.

Option Two is to purchase a German-made production machine (but with no need for specialised supervisor) at the cost of 140,000. The additional net cash operating inflow due to this investment will be 50,000 in the first year, 65,000 in the second year, and 70,000 in the third year.

The minimum desired rate of return for both investments is 10%. Both machines have no salvage value round all discount factors to three decimal places.

1. Answer the following

a) Explain whether management was right to include the supervisor cost in Option One as a relevant cost for this investment option (2 marks)

b) Calculate the NPV for both investments (18 marks)

c) Which one of the two options should Kenjo Ltd choose and why (2 marks)?