QUESTION $3$

Carbon plc is planning to buy a new machine and has found two which meet its needs. Each machine has an expected life of five years.

Machine $1$ would generate annual cash flows $($receipts less payments$)$ of $210,000$ and would cost $570,000.$ Its scrap value at the end of five years would be $70,000.$

Machine $2$ would generate annual cash flows of $510,000$ and would cost $1616,000.$ The scrap value of this machine at the end of five years would be $301,000.$ Carbon plc uses the straight$-$line method of depreciation and has a target return on capital employed of $20$ percent.

Required

Calculate the return on capital employed for both Machine $1$ and Machine $2$ on an average investment basis and state which machine you would recommend, giving reasons.