Ideal Construction Ltd (ICL) is considering a purchase of a special purpose fabrication machine for making concrete walls. Two machines that differ in their useful lives are being offered by a supplier. Model A can work well for two years while Model B can work well for three years. The supplier has priced the two models very smartly so that both models sell well in the market. Model A with 2 year useful life is priced at Tshs 500 million while Model B with three years is quoted at Tshs 850 million. The marketing department of the supplier organization convinced the management of ICL that buying either of the models would be equally profitable to them.

After a study of the various aspects associated with the fabrication, the management came out with the following projections of the cash inflows from the two models.

Required:

If the cost of capital for ICL is 11% which of the two models should they procure?

Cash Flows (Tshs Million) Year Model A Model B Capital Cost 500 850 350 450 250 350 Required: If the cost of capital for ICL is 11% which of the two models should they procure