Indium Ltd is considering the purchase of a new machine. Two alternatives are being considered,

Machine A and Machine B.

Each machine will have a working life of five years. The initial cost of machine A is $400,000,

with a scrap value of $20,000, and the initial cost of machine B is $450,000 with a scrap value of

$50,000.

The following information is available:

Machine A
YEAR	SALES $	COST $	PROFIT $
1	900000	700000	200000
2	900000	700000	200000
3	800000	650000	150000
4	800000	650000	150000
5	700000	580000	120000

Machine B
YEAR	SALES $	COST $	PROFIT $
1	950000	770000	180000
2	870000	700000	170000
3	800000	690000	110000
4	750000	620000	130000
5	650000	500000	150000

The total costs are inclusive of depreciation

The companys cost of capital is 10%

Required:

a) Either Machine A or Machine B, calculate the Accounting rate of return (ARR), payback

method, and Net present value (NPV). (5 marks)

b) State FOUR reasons, why the Net Present Value method is preferable to the Payback

method? (2 marks)

c) A further method of evaluation is the Internal Rate of Return. State briefly how the Internal

Rate of Return is calculated and its significance. (1 mark