Keon Ltd has two mutually exclusive projects under consideration. Both projects can be considered replacement projects.
The details of the projects are given in the table below.
|Project A||Project B|
|Development costs to date||$125,000||$135,000|
|Life of project||4 years||5 years|
|Depreciation||Straight line, fully over life of project||Straight line, fully over life of project|
|Machine cost||$2.4 million||$3.5million|
|Residual||No residual||No residual|
|Working capital needs||Injection of $250,000 at beginning of project||One injection only of $500,000 at beginning of project|
|Further injection of $150,000 at the end of year 1|
|Sales||$1.3m for each year of the project||$1.57 m for each year of the project|
|Cost of sales||$0.23m for each year of the project||$0.345m for each year of the project|
|Other costs||$0.016m for each year of the project||$0.026m for each year of the project|
|Finance needs||Yule Ltd would need to borrow $1m for 3 years at 7% p.a.||Yule Ltd would need to borrow $1.1m for 4 years at 7% p.a.|
|Discount rate for project||12.5%||12.5%|
There is no inflation.
Use NPV analysis to advise Keon Ltd as to which project, if either, should be adopted.
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