A company is evaluating the investment in new machinery to manufacture a new product.

2 alternatives (Machine A and Machine B) are being considered.

Estimates for the two machines are:

Machine A Machine B

Initial cost $800,000 $760,000

Useful life 5 years 5 years

Residual value at the end of 5 years

$120,000 $60,000

Annual profits (net of straight line depreciation)

$100,000 $80,000

The company has a cost of capital of 12% per annum.

Discount factors:

10% 12% 15% 20%

Year 1 0.909 0.893 0.870 0.833

2 0.826 0.797 0.756 0.694

3 0.751 0.712 0.658 0.579

4 0.683 0.636 0.572 0.482

5 0.620 0.567 0.497 0.402

Evaluate each machine using the following methods:

(i) Payback

(ii) Net present value

(iii) Internal rate of return

(iv). Profitability index