Reference no: EM132600565

Patel Company Ltd a manufacturing firm is considering whether to invest in one of the 2 automated machines, A or B both of which give rise to manpower and other cost savings over the existing manual process.

The relevant data relating to each of the machines is given in the following table;

                                                  Machine A ($)                    Machine B ($)

Investment Outlay               (110,000)                        (120,000)

immediately)

Year 1 annual cost savings     60,000                            50,000

Year 2 annual cost savings     50,000                            45,000

Year 3 annual cost savings       40,000                          40,000

Year 4 annual cost savings         30,000                      35,000

Year 5 annual cost savings          20,000                     30,000

The required rate of return is 12% per annum

Required;

Question (a) Advise Patel Company Ltd on which proposal to invest in using the NPV method

Question (b) Further discussion with the Machine's Supplier revealed that machine A has a salvage value of $ 20,000 and machine B has a salvage value of $ 30,000. Advise the Management of Patel Company Ltd on the best proposal after incorporating the new information above.