Question 5

A company is considering two alternative investments in a machine as part of a workshop upgrade. Partial results of some financial analysis are as follows:

ARR Payback Period NPV @ 6% IRR pa

Machine A 45% 2.5 years $21,666 32%

Machine B 61% 52%

Machine B will cost $16,000 and have estimated annual incremental cash flows of $10,000 for the next 3 years AND an estimated salvage value of $8,000 at the end of the 3 year period.

Question: Calculate the Payback Period (PBP) for Machine B assuming cash flows are received evenly throughout the year. Calculate the NPV for Machine B if the cost of capital is 6% pa and assuming cash flows are received at the end of each year. Explain which machine you would recommend based on all of the information.