Vimal Electric business is badly affected as its retail business has to be temporarily closed down. To ensure sustainability in their business, the management has decided to explore online business. The main obstacle face by the management is how to ensure their products reach their customers on time. They have been assessing the following options:

The first option is by setting up their own courier services company. The management believes that, with the current MCO extension, the company can expand its services to other merchants nearby. The initial cost for this new business is 2.5 million. The management forecasts it will cause a cash outflow of 600,000 in year 1, cash inflow of 1,500,000 in year 2, 1,100,000 in year 3 and 4, and 1 million in the final year. To realize this plan, the management can obtain an affordable low financing cost loan of 7.99 percent per annum from the Bank.

The second option is to outsource the delivery services to a local courier services company, RTX electrical shop All the delivery services will be carried out in this company. The management needs to prepare an initial non-refundable deposit that cost 500,000. By adopting these services, the management is confident that it will cause a cash inflow of 200,000 in year 1, cash outflow of 150,000 in year 2, 280,000 in year 3 and year 4 and 400,000 in the final year. The financing cost for the deposit is 7.99 percent per annum.

VImal Electric currently is paying a corporate tax rate of 30 percent.

1. Estimate the Net Present Value (NPV) and Internal Rate of Return (IRR) for both alternatives.

2. Determine payback period for both options.
3. Measure the profitability index (PI) for both alternatives.

4. Based on the answers in (a) to (c), advise the management of KF Electric the best alternative to be taken if it is a mutually exclusive project. Justify your answer.