Reference no: EM132541951

Point 1: Diana's friend, using her marketing knowledge has recently undertaken, at the cost of $3,000, a detailed analysis of the emerging trends in the furniture industry. Based on the findings, she suggested that, to remain competitive, the business must add at least one new type of furniture to its existing product mix. Working together with Diana, who has some accounting and finance knowledge, she has come up with two propositions, the Cora and the Dona, which are new design wooden center tables. Due to limited funds, Diana must select only one project.

Point 2: The Cora is expected to be produced and sold in monthly batches of 5,000 units. Selling price is expected to be $12 in the first 2 years, rising by 5% each year in the following 3 years. Variable production costs would amount to $8 per unit and this is expected to rise by 3% annually over the next 5 years. A special wood cutting machine will have to be bought immediately, costing $900,000 and scrap value is expected to be $50,000 at the end of its lifetime.

Point 3: The Dona will require investment in a new machine costing $500,000, scrap value being $ 25,000. Monthly production is expected to be 4,000 units. Since it will be using better wood quality, variable costs are expected to be $10 per unit, rising by 5% each year. Selling price would be $13 and this is expected to remain constant.

Point 4: Both projects would necessitate additional working capital of $50,000 immediately, which will be recovered in full at the end of the project's life.

Point 5: Diana is of the view that since Dona requires lower investment and has a higher selling price, it will be more profitable to invest in this project. The cost of capital is 10%

Required:

Question 1: Advice Diana which project is the better investment, supporting your answer with relevant calculations.