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QUESTION TWO [20] Mr James, an ardent photographer has decided to take his first steps on realising his entrepreneurial dream. He has been mulling over various options and has narrowed them down to 2 options. Mr James asks for your assistance in resolving the dilemma that he faces. REGENT BUSINESS SCHOOL (RBS) July 2019 POSTGRADUATE DIPLOMA IN MANAGEMENT - ACADEMIC AND ASSESSMENT CALENDAR Option 1 Rent an office at La Lucia Mall and purchase photo developing equipment and other devices necessary for this venture. This will involve the actual printing/development of photos, "burning" of CDs/DVD's, etc. Option 2 Purchase a state of the art Nikon Camera Kit and take photos/record videos of special events (weddings, birthdays, anniversaries, etc). This will entail spending on an advertising campaign in order to aggressively seek market share. Project cost and other data Option 1 Option 2 Cost of investments (Total) 400 000 90 000 Expected useful life 5 years 5 years Salvage value 50 000 10 000 Cost of Capital (After tax) 9% 9% Project Revenues Year 150 000 20 000 Year 2 30 000 30 000 Year 3 80 000 50 000 Year 60 000 30 000 Year 5 40 000 15 000 Required: 2.1 If Mr James requires a payback period of no more than 3 - years which project should he choose? Show your calculations. (8) 2.2 Suggest flaws in the valuation method (payback period). (2) 2.3 Use the NPV method to test which project is more viable