A motor car manufacturing firm has decided to invest in a new equipment to improve its production process. The following are the cost of both equipment and the expected cash flow from each. The required rate of return is 10%.

Equipment A Equipment B

Cost: $300,000 $400,000

Cash flows $ $

Yr 1 40,000 50,000

Yr 2 60,000 55,000

Yr 3 70,000 80,000

Yr 4 75,000 85,000

Yr 5 70,000 80,000

Yr 6 90,000 70,000

Required

You are the Management Accountant, advise the firm which equipment should be purchased and why.