(i) Project A (Rs.) Year 0 Cash flow (40,000) 15,000 5,000 Discount factor Present value 1.0000 (40,000) 2.8550 42,825 0.5718 2,859 1-4 4 NPV = 5,684 (i) Project B (Rs.) Year 0 Cash flow (60,000) 16,000 3,000 Discount factor Present value 1.0000 (60,000) 4.1604 66,566 0.3759 1,128 1-7 7 NPV = 7,694 36 Suggestion: If Projects A and B are one-off investments, then Project B is preferable. (ii) Uniform Annual Equivalent A 5,684 = 1,991 2.8550 7,694 B= 4,1604 1,849 Suggestion: Choose Project A for continual repeats. Illustration 7: Company X is forced to choose between two machines A and B. The two machines are designed differently, but have identical capacity and do exactly the same job. Machine A costs Rs. 1,50,000 and will last for 3 years. It costs Rs. 40,000 per year to run. Machine B is an economy model costing only Rs. 1,00,000, but will last only for 2 years, and costs Rs 60,000 per year to run. These are real cash flows. The costs are forecasted in rupees of constant purchasing power. Ignore tax. Opportunity cost of capital is 10 per cent. Which machine company X should buy