XYZ Ltd is considering purchasing a new machine, and the relevant facts concerning two possible choices are as follows:
|
Machine A |
MachineB |
|
|
Capital expenditure required |
£65,000 |
£60,000 |
|
Estimated life in years |
4 |
4 |
|
Residual value |
nil |
nil |
|
Cash flow after taxation each year |
£25,000 |
£24,000 |
The company’s cost of capital is 10%.
Required
Calculate, for each machine, the payback period, the net present value and the profitability index. State, with reasons, which machine you would recommend.