Lee Caterers Ltd is about to make an investment in new kitchen equipment. It is considering whether to replace its existing kitchen equipment with cook/freeze or cook/chill technology.

The following cash flows are expected from each form of technology:

Cook/chill

£000 Cook/freeze

£000 Initial outlay (200) (390)

1 year’s time 85 88 2 years’ time 94 102 3 years’ time 86 110 4 years’ time 62 110 5 years’ time – 110 6 years’ time – 90 7 years’ time – 85 8 years’ time – 60 The business would expect to replace the new equipment purchased with similar equipment at the end of its life. The cost of capital for the business is 10 per cent.

Required:

Which type of equipment should the business invest in? Use both approaches to dealing with this problem, which were described in the chapter, to support your conclusions.