MILA Home Company is planning to purchase a special machine capable to do certain operations that are now performed manually. This machine will cost $135,000, and it will last for four years. At the end of the fourth-year period, the machine will have residual value of zero. Moreover, use of the machine will reduce labour costs by $78,000 in year 1, $75,000 in year 2, $71,000 in year 3, and $68,000 in year 4. MILA Home Company requires a minimum return of 25 percent before taxes on all investment project.

Required:

1. Should the machine be purchased? Use the net present value method in your calculation. (13 marks)

	Future Cost Savings	PV of Future Cost Savings
Year 1
Year 2
Year 3
Year 4
Total

NPV Calculation:

PV of Future Cost Savings
Less: Initial Cost of Investment
= Net Present Value (NPV)

2. What is the payback period for this machine? (4 marks)

3. Which method would you prefer and why? (3 marks)