Holden Ltd is a bubble-wrap manufacturing company that produces a number of bubble products such as bubble wraps and envelopes. The companys recently hired Managing Director, Mr Green is leading on environmental initiatives in a bid to reduce energy consumption and, thus, the carbon emissions associated with production.

Mr Green has asked you, the Finance Manager, to replace the current machinery with a more sustainable and environmentally friendly one. Your team has proposed two machines for you to choose from that use cutting-edge technology to produce the current products in a more environmentally friendly way. The team has supplied the following information for you.

Table 2 Net cash flows for new machinery options

	Project net cash flows ()
	Machine A	Machine B
Year 0	(1,500,000)	(2,200,000)
Year 1	740,000	670,000
Year 2	570,000	700,000
Year 3	480,000	830,000
Year 4	420,000	900,000
Year 5	360,000	1,070,000

Holden Ltd uses the straight-line method of depreciation and its cost of capital (i.e. the discount rate) is 15%. It is assumed that Machine A will have a residual value of 30,000 at the end of the five years, while Machine B will have a residual value of 50,000 at the end of the five years.

The companys policy for new investments is that the investment should pay itself back within three years.

• a.Calculate the payback period and net present value (NPV) of the proposed two machines. You are required to show all your workings to support your answers. (14 marks)
• b.Advise Mr Green on which machine the company should invest in based on your calculations in part (a) and provide a detailed explanation of your advice. (10 marks)