Rank Buildersis considering the replacement of its existing machine, which is obsolete, with either of the following two alternatives:
(i) Machine A which is similar to the existing one or
(ii) Machine B which is more expensive and has much greater capacity.
The cash flow at the present level of operations under the two alternatives are as follows:
|
Cash Flows
|
0
|
1
|
2
|
3
|
4
|
5
|
|
Machine A
|
(525,000)
|
45,000
|
105,000
|
355,000
|
295,000
|
210,000
|
|
Machine B
|
(840,000)
|
210,000
|
295,000
|
355,000
|
375,000
|
300,000
|
Rank's cost of capital is 10%. Help the owner evaluate the alternative machines by calculating the following:
A. Payback
B. Discounted Payback Period
C. Net Present Value
D. MIRR
Which machine would you advise him to buy and why?