ABC Limited needs to purchase a machine to use in its operations. The initial cost and net cash inflows from each machine for four years is shown in the table below. The opportunity cost for investing in the machines is $14\%.$

Cash Flow Machine A Machine B

$ $

Initial Cost $(130,000)(70,000)$

Net Cash inflows$/$profit

Year $185,00013,000$

Year $285,00013,000$

Year $385,00013,000$

Year $485,00013,000$

Total inflows$/$profit $340,00052,000$

Discount factor table

Year $10\%12\%14\%16\%$

$10\mathrm{.}90910\mathrm{.}89290\mathrm{.}87720\mathrm{.}8621$

$20\mathrm{.}82640\mathrm{.}79710\mathrm{.}76950\mathrm{.}7432$

$30\mathrm{.}75130\mathrm{.}71180\mathrm{.}67500\mathrm{.}6407$

$40\mathrm{.}63800\mathrm{.}63550\mathrm{.}59210\mathrm{.}5523$

Required:

a$.$ Calculate the ARR on initial capital for both machines. $(4$ marks$)$

b$.$ Calculate the ARR on average capital for both machines $(4$ marks$)$

c$.$ Calculate the net present value $($NPV$)$ for machine A and machine B$.(7$ marks$)$

d$.$ Based on the NPV$,$ identify the machine that the company should choose giving ONE

reason for your choice. $(1$ marks$)$

e$.$ State TWO advantages of using the NPV method of investment appraisal. $(2$ marks$)$

f$.$ State TWO advantages of using the payback method of investment appraisal. $(2$ marks