Question
The managing director of ABC Pty Ltd is considering to invest their spare cash in a new device to improve the efficiency of the business.
The managing director of ABC Pty Ltd is considering to invest their spare cash in a new device to improve the efficiency of the business. They are considering between 2 independent investment opportunities for this devise. Each investment will require the company to have an initial cash outlay of $500,000. Below is the data that has been provided by the finance officer in regards to the expected cash inflow for investment A. The residual value at the end of year 4 is $50,000, which has not been included in the table below.
Year 1 investment A $120,000
year 2. investment A $140,000
year 3 investment A $160,000
year 4 investment A $ 200,000
A. Calculate the payback period and Net Present Value for investment A if the cost of capital is 5%. (3 marks) B. It is known that investment B has a payback period of 2.83 years and the NPV is $63,539. Based on your calculation of the payback period and Net Present Value for investment A and the data given, which investment would you recommend that the managing director should take if investment A and investment B are mutually exclusive? (2 marks)
C. If there is a conflicting answer between payback period method and Net Present Value. Which of these measures would you choose? Explain your reasons. (2 marks)
D. Provide 3 disadvantages (limitations) of the Net Present Value (NPV) method. (3 marks)
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