The management of ABC company are considering buying a new machine which would produce parts for a client.

They have 2 options:

Machine A costs $165,000 (useful life: 7 years, salvage value: $15,000) and would have cash sales of

$124,000 and cash costs of $80,000 each year during its useful life. It would require $20,000 of working capital which

is released at the end of the period.

Machine B costs $140,000 (useful life: 7 years, salvage value: $16,000) and would have cash sales of

$111,000 and cash costs of $74,000 each year during its useful life. It would require $16,000 working capital which is

released at the end of the period.

The discount rate of ABC is 12% and the tax rate is 20%. Normally ABC gets their investment back in 4.5

years.

Required:

a) Compute the NPV for each machine. Which investment is better according to this method?

b) Compute the IRR for each machine. Which investment is better according to this method?

c) Compute the PBP for each machine. Which investment is better according to this method?

Moreover, I need detailed explanation of calculations.