Preview Ltd is considering an investment in a new machine for the production of a new product $x.$ ?There are two possibilities, Machine A and Machine B$.$ ?Both the product and the machine would have an expected life of five years.

The following information is available:

Product $x$ ?Selling price $N$$$50$

Variable cost $N$$$32$

Increase in fixed overhead $($excluding depreciation of the new machine$)$ ?is $N$$$90,000$ ?per year.

$\backslash$table$[[,$Sales units,,$],[$Year $1,10,000,,],[2,15,000,,],[3,20,000,,],[4,20,000,,],[5,5,000,,],[,,$Machine A$,$Machine B$],[$Initial cost $($N$$000),550,480,],[$Residual value $($N$$000),50,30,]]$

The company's cost of capital is $10\%,$ ?the appropriate discount factors are:

$\backslash$table$[[$Year $1,\mathrm{.}909],[$Year $2,\mathrm{.}826],[$Year $3,\mathrm{.}751],[$Year $4,\mathrm{.}682],[$Year $5,\mathrm{.}621]]$

Required:

$($a$)$ ?Evaluate each machine, A and $B,$ ?using the following methods:

$($i$)$ ?Accounting rate of return $($using average investment$)$

$(8$ ?marks$)$

$($ii$)$ ?Payback

$(8$ ?marks$)$

$($iii$)$ ?Net present value

$(8$ ?marks$)$

$($b$)$ ?On the basis of your figures in $($a$)$ ?above, advice management as to which machine to purchase, stating reasons for your decision. $(1$ ?marks$)$