THE RED N = 3

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DO NOT USE EXCEL

Q4(a) Smart Metals Company is considering two different investment alternatives. Investment A has an initial cost of $25,000, and investment B has an initial cost of $26,000. Both investments have a useful life of 4 years. The cash flow for the investment, at present day prices, is shown below. The cost of capital is 7% p.a. The cash flows in future years are subject to price changes, as a result of inflation, which is estimated at 1.N % p.a. (i) Which investment is most financially attractive? (40 marks) (ii) What other factors might be considered in making the decision? (10 marks) Year Investment A's Investment B's cash flow ($) cash flow ($) 9,000 1 10,000 9,000 8,000 9,000 2 9,000 3 7,000 9,000 4