Reference no: EM133173052

Question -

a) You are starting an Asian fusion restaurant and need to buy an electrical vehicle for delivery orders, as you are worried about the impact the emissions generated from the deliveries will harm the environment. You are considering two models. Model 1 costs $50,000 and is expected to run for 8 years. Model 2 costs $55,000 and is expected to run for 11 years. The annual maintenance costs are $1,500 for Model 1 and $1,000 for Model 2. Assume that the cost of capital is 8 percent.

In considering the initial outlay and ongoing annual expense of owning either of the electrical vehicles over different lives, which one should you buy?

b) ElectroTech Ltd is thinking about purchasing equipment that costs $1,200,000 for a new project. The equipment will produce sales of $400,000 per annum for six years. Expenses associated with the sales will be $100,000 per annum. Consultancy and research and development (R&D) costs incurred before the project commences will be $80,000. Other cash expenses will be $20,000 per year. The equipment is expected to sell for $100,000 at the end of its six-year life and will be depreciated on a straight-line basis over six years to zero. ElectroTech's tax rate is 30 percent and its cost of capital is 12 percent.

i) What is the project's NPV and IRR?

ii) Should ElectroTech accept or reject the project? Why?

iii) What other considerations should be made regarding the project decision?