ASD Ltd is considering the purchase of a new machine. Two options have been suggested, each costing $400,000. Earnings after taxation but before depreciation are expected to be as follows: Year Machine X $ Machine Y $ 1 2 3 4 5 40,000 120,000 160,000 240,000 160,000 120,000 160,000 200,000 120,000 80,000 On this base, you are required:
a) Compute the Pay-back Period and
b) The Company has a target rate of return on capital @10%. Calculate NPV.
c) To compare profitability index of the machines and state which option you consider financially favourable