Medrano Ltd is a furniture manufacturer. The company is looking at three alternative specialised machines to replace its existing production line. Data for each of the machines are as follows:

Machine		Expected annual profit increase		Estimated annual net cash inflows increase		Estimated life		Initial cost
Furniture Fixer Framing Furniture Carpenter’s Mate		$590000 510000 520000		$400000 320000 320000		10 years 12 years 8 years		$1500000 1200000 1 100000

The company’s cost of capital is 12%.

Required

A.  Rank the three machines using each of the following methods:

1. Net present value method

2. Net present value index

3. Payback period

4. Return on average investment

B.  Comment on the rankings under the four methods of evaluating the machines and explain which method would provide the best result for the firm and why payback period or return on average investment might be preferred by Medrano Ltd.