7. A company wants to replace its existing machine by machine A which is of similar kind or by machine B which is more expensive and of higher capacity, due to the increased demand. The available cash flow from the two machines are as follows:

Machine Initial Outlay Cash Inflow (` in lakh) at the end

` in lakh 1 2 3 4 5 A 25 Nil 5 20 14 14 B 40 10 14 16 17 15 The company’s cost of capital is 10%. The finance manager tries to appraise the machines by calculating the following:

(i) NPV

(ii) PI

(iii) DPBP Comment on these calculations and guide the manger to select the investment.