Infinite Ltd is considering two investment options. The first option involves an upgrade to an existing food processing facility and the second option building a new food processing facility. Infinite can only undertake one of the two options so is evaluating which option they should choose. Infinite uses the straight-line method of depreciation and the residual value for both Options A and B is expected to be \(\$ 125000\) at the end of five years. Infinite's required rate of return on investments is 20 per cent.

Required:
a Calculate the payback period for options A and B.
b Calculate the accounting rate of return for options A and B.
c Calculate the NPV for options A and B.
d Make a recommendation on which option Aussie should invest in based on your calculations.

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The cash flows for options A and B are as follows. Option A: Upgrade existing facility Year 0 Year 1 Cash inflows 400 000 Cash outflows 175 000 Option B: Build new facility Cash inflows Cash outflows -487 500 Year 0 - 500 000 Year 1 612 500 250 000 Year 2 450 000 175 000 Year 2 575 000 225 000 Year 3 500 000 225 000 Year 3 500 000 200 000 Year 4 550 000 225 000 Year 4 450 000 175 000 Year 5 60 000 250 000 Year 5 40000 150 000