Question 2: A company is considering following two alternatives for investment a

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Question 2: A company is considering following two alternatives for investment and it must choose only one. The cash flows associated with each alternative is shown. Option A 2,500,000 700,000 100,000 at the end 50,000 at the end of of 2nd year 20,000 every year 70,000 every 5 years 10 Option B 4,500,000 500,000 First Cost, S Annual Operating Costs, S Additional one time service cost, S 2nd year Maintenance Costs, $ Life, years 20 (a) Draw the cash flow of each alternative, fully label your diagrams. (b) Which alternative should the company choose? You are asked to compare the two 4 marks) alternatives based on their net present work, using an advise the company which option they should choose and why. two (7 marks) alternatives based on their net present work, using an annual 10% interest rate and

Explanation / Answer

Answer of question no 1

(i) amount payable after 5 years = principal + Interest

= 500000 + (500000*10%*5years)

= 500000 + 250000 = 750000

(Ii) amount payable in case of compounding interest = principal* (1+r)n

= 500000* (1.1)5

=500000*1.6105

= 805250

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