Donald Ltd is considering replacing an asset with one of two possible machines:

The machines will be required into the foreseeable future. The company's cost of capital is $10 \%$.
Required:

Calculate which machine should be purchased.

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Machine X Machine Y Initial cost Life Running costs Residual value Initial cost Life Running costs $120,000 3 years $20,000 p.a. nil $60,000 2 years Year 1: $40,000 Year 2: $35,000 Residual value nil