1. Marcon Limited is considering purchasing a new truck which is expected to save labour on an existing project. The estimated date for the two machines available on the market are as follows:

Machine A Machine B

GHS 000 GHS 000

Initial cost (year 0) 115,000 115,000

Residual value of machines 20,000 30,000

(year 5)

Annual labour cost savings:

Year 1 40,000 30,000

2 40,000 30,000

3 45,000 30,000

4 20,000 70,000

5 20,000 20,000

Which machine will be selected under the following criteria :

1. NPV assuming a cost of finance of 10 percent p.a?

(4 marks)

2. Internal rate of return?

-Steps work out another NPV using a finance cost higher than 10% for both machines which will result in a negative NPV

- This will result in a negative NPV for both machines A and B

- for Machine A pick its NPV @10% and NPV 25% and substitute it into the IRR formula . This will give you a rate

- Repeat step three for Machine B. Compare both rates decision: choose the IRR with the highest rate.

(8 marks)

iii. Payback period