Pegg Ltd is considering investing in a machine in order to increase its profitability. Two machines, A and B, are under consideration. The estimated annual profit increases (in £000) after the calculation of straight-line depreciation over the life of the machines are as follows: Machine A B Year 1 300 250 2 350 250 3 400 500 4 150 150 5 50 220 Both machines have an initial cost of £800,000. The residual value of Machine A is expected to be £30,000 and that of Machine B, £20,000. The Chairman of the company has stated that, for the foreseeable future, the liquidity situation of the company needs to be carefully monitored. You are required to: (a) Calculate the Pay back period for both machines A and B . (b) Calculate the Accounting Rate of Return for each machine, using the average capital invested I If the company's cost of capital is 8% per annum, calculate the net present value of each machine. (10 marks) (d) On the basis of the answers to (a), (b) and (c) above , advise with reasons as to which machine should be purchased. (3 marks) (e) Define "Internal rate of return" [IRR] and state one