Problem:
An Australian manufacturing company with all shareholders located in the Ivory Coast, a country located off the mainland of Africa. The financial manager is currently in the process of evaluating two types of quality control systems for installation in the company's manufacturing plant. The company is all equity financed, with shareholders holding shares which pay a six-monthly fixed dividend of 30 cents per share. The shares were issued on commencement of the company 18 months ago at $3.75 each and are currently trading at $5. Each quality control system is expected to have a useful life of eight years and to result in the following after-tax costs:
System A System B
$ $
Initial Cost 62,500 100,000
Salvage value at end of useful life Nil 25,000
Annual variable costs of operation 13,750 10,000
Annual cost of repairs and maintenance 6,250 3,000
Note : Assume expenditures occur at the end of each period.
Required :
a) Calculate the net present value of each quality control system.
b) Briefly discuss whether it is possible for the company to accept both quality control systems.