"ABTS Co Ltd is considering the purchase of a new machine. Two alternative machines (A and B) have been suggested each having an initial cost of R400 000 and requiring R20 000 as additional working capital at the end of the 1st year. Earnings after taxation are expected to be as follows. All cash flows are expected at the end of each period.

Year1 Year 2 Year 3 Year 4 Year 5

Machine A R40 000 R120 000 R160 000 R240 000 R160 000

Machine B R120 000 R160 000 R200 000 R120 000 R80 000

The company has target return on capital of 10% and on this basis, you are required to compare the profitability of the machines and state which alternatives you consider financially preferable using the i) Payback, ii) Net Present Value and iii) Internal Rate of Return methods."

I just want to know how we treat the R20 000 of additional working capital at the end of the 1st year.