In view of the increase in turnover over the past year, Wholesale Foods PLC needs to invest in its manufacturing facilities so that it can increase production. For some time, the company has been considering buying new blending equipment which would help to combine larger volumes of raw materials to support higher production levels. There are two options. As Financial Director, you have been asked to complete an investment appraisal of both options in readiness to present to the Board of Directors for their approval.

The new equipment will provide estimated cash flows as follows:

	Machine 1 (000s)	Machine 2 (000s)
Cost (immediate outlay)	220	160
Expected annual profit (loss):
Year 1	90	50
Year 2	(12)	(4.5)
Year 3	15	12
Expected residual value	40	30

The company has an estimated cost of capital of 10 per cent and employs the straight-line method of depreciation for all fixed assets when calculating net profit. Project 1 requires additional working capital of 20,000 immediately whereas project 2 requires an injection of working capital of 15,000 at the start of year 2. The company has sufficient funds to meet all capital expenditure requirements, and working capital is fully recovered at the end of project lives.

Required:

Looking at both machines, complete a capital investment appraisal for each. To provide the company with a range of forecasts, you intend to include a number of capital appraisal techniques to enable them to make a sound decision on which project to choose. As part of your report, therefore:

Calculate for each machine:

(3)	Net Present Value
(4)	Approximate Internal Rate of Return
(5)	Payback

(6)	After completing the calculations, state whether or not the project should be undertaken and, if so, which machine should be bought. Provide your reasons to justify your recommendation