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QUESTION 24 Corandi Ltd is considering the purchase of a new machine that is expected to save labour cost on an existing project. The estimated
QUESTION 24 Corandi Ltd is considering the purchase of a new machine that is expected to save labour cost on an existing project. The estimated data for the two machines available on the market are as follows: Machine A Machine B $ $ Initial cost 130,000 130,000 20,000 30,000 Residual value (Year 5) Annual labour cost savings: Year 1 50,000 20,000 Year 2 40,000 50,000 Year 3 30,000 50,000 Year 4 25,000 60,000 Year 5 20,000 10,000 Required: Which machine will be selected under the following criteria: a) NPV (Net present Value), assuming a cost of capital of 10 per cent per annum? b) Internal rate of return (IRR)? c) Accounting rate of return (ARR)? d) Payback period (PBP) Ignore taxation, and treat the savings as if they will occur at the end of the relevant year. Explain your selection
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