The managers of Stanley Standen Ltd are considering the purchase of either machine Elpha or machine Fettan. The following information applies to these machines.

Both machines are expected to last five years. They are depreciated using the straight-line method and are expected to be sold at the end of their life: Elpha for $30 000 and Fettan for $80,000.

The machine Fettan creates toxic waste. This waste would be disposed of using lorries which would travel through the local town. 

Required

a. Calculate the payback period for each machine. 

b. Calculate the ARR for each machine. 

c. Which machine do you recommend that the managers of Stanley Standen Ltd should purchase? Justify your recommendation.

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Elpha $ Fettan $ Purchase price 400 000 500 000 Net cash inflows Year 1 140 000 80 000 Year 2 140 000 120 000 Year 3 140 000 180 000 Year 4 140 000 220 000 Year 5 140 000 280 000