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In the Table below is information about two options that face the Alpha & Omega Company as it seeks to expand its operations. Note that all cash flows are at the end of the year except for the initial costs.

	Option 1	Option 2
Initial cost	$680,000	$720,000
Usage life	5 years	6 years
Salvage value at end of useful life	$20,000	$30,000
Cash flows (excluding salvage value):
Year 1	$140,000	$ 80,000
Year 2	$140,000	$180,000
Year 3	$140,000	$280,000
Year 4	$140,000	$380,000
Year 5	$140,000	$260,000
Year 6	$ -	$150,000
Depreciation method is straight line
Tax rate is	20%	20%
Companys cost of capital	12%	12%

Present value of $1.00

	Rate per period
Periods	6%	12%
1	0.9434	0.8929
2	0.8900	0.7972
3	0.8396	0.7118
4	0.7921	0.6355
5	0.7473	0.5674
6	0.7050	0.5066
7	0.6651	0.4524

Present value of Ordinary Annuity of $1.00

	Rate per period
Periods	6%	12%
1	0.9434	0.8929
2	1.8334	1.6900
3	2.6730	2.4018
4	3.4651	3.0373
5	4.2124	3.6048
6	4.9173	4.1114
7	5.5824	4.5638

1 Calculate the net present value for each option.

2 Calculate the payback period for each option

3. Based on the results in (a) and (b) what course of action would you recommend to the management of Alpha & Omega Company?

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