Ridha Co. plans to replace an existing machine and must choose between two machines. Machine 1 has an initial cost of OMR 200,000 and will have a scrap value of OMR 25,000 after four years. Additional maintenance cost of machine1 is OMR 20,0000. Machine 2 has an initial cost of OMR 225,000 and will have a scrap value of OMR 50,000 after three years. Additional maintenance cost of machine 1 is OMR 25,0000. Ridha Co. can sell the existing machine for OMR 45,000

Annual earnings of the two machines are as follows:

Year

1

2

3

4

Machine 1 (OMR per year)

75,000

65,000

50,000

45,000

Machine 2 (OMR per year)

85,000

70,000

55,000

Ridha Co has a cost of capital of 12%.

1. Calculate the net cash outflows of machine 1 and machine 2 respectively.2. What is NPV of Machine 1?

3. What is NPV of Machine 2?

4. Which machine you suggest Ridha Co. to buy?