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Question 3 The XYZ Company is considering investing in a machine. There are two options available. Machine A requires an initial investment of $140,000 and
Question 3 The XYZ Company is considering investing in a machine. There are two options available. Machine A requires an initial investment of $140,000 and Machine B $210,000. The useful life of both machines is 5 years. Machine A will sell for 420,000 and B for 430,000 at the end of their useful lives. Both machines are expected to generate the following cash flows: CASH FLOW Year Machine R Machine S $ $ 1 20,000 80,000 2 35,000 80,000 3 40,000 90,000 4 60,000 50,000 5 38,000 30,000 The firms cost of capital is 14%. Required: A. Calculate for each machine: i. The payback period (4 marks) ii. The net present value (10 marks) iii. Profitability index (4 marks) B. Based on the calculations in (A) above, which machine should be chosen. Explain your recommendation. (2 marks) (Total 20 marks)
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