ABC Tool, a large machine shop, is considering replacing one of its lathes with either of two new lathes-lathe A or lathe B. Lathe A is a highly automated, computer-controlled lathe; Lathe B is a less expensive lathe that uses standard technology. To analyze these alternatives, a financial analyst, prepare estimates of the initial investment and incremental (relevant) cash inflows associated with each lathe. These are given below:

Your task is to analyze both lathes over a 5-year period. At the end of that time, the lathes would be sold, thus accounting for the large fifth-year cash inflows. One of ABC's major dilemmas centered on the risk of the two lathes. The financial analyst feels that although the two lathes have similar risk, Lathe A has a much higher chance of breakdown and repair due to its sophisticated and not fully proven solid-state electronic technology. Because the financial analyst is unable to effectively quantify this possibility. You are asked to apply the firms, 13 percent cost of capital when analyzing the lathes. ABC requires all projects to have a maximum payback period of 4 years.
a. Use the payback period to assess the acceptability and relative ranking of each lathe.b. Assuming equal risk, use the following capital budgeting techniques to assess the acceptability and relative ranking of each lathe:
1) Net present value (NPV).
2) Internal rate of return (IRR).
c. Summarize the preferences indicated by the techniques used in a and b, and indicate which lathe you recommend assuming that the projects are (1) independent (2) mutually exclusive.

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2 3 5 4 Lathe -660,00o 128,000 182,000 166,000 168,000 450,000 A Lathe -360,000 | 88,000 120,000 96,000 86,000 86,000 207,000 B