Meer has been offered a special-purpose metal-cutting machine for €110 000. The machine is expected to have a useful life of eight years with a terminal disposal value of €30 000. Savings in cash-operating costs are expected to be €25 000 per year. However, additional working capital is needed to keep the machine running efficiently and without stoppages. Working capital includes such items as filters, lubricants, bearings, abrasives, flexible exhaust pipes and belts. These items must continually be replaced so that an investment of €8000 must be maintained in them at all times, but this investment is fully recoverable (will be 'cashed in') at the end of the useful life. Meer's required rate of return is 14%.

Required

1. a. Calculate the net present value.

b. Calculate the internal rate of return.

2. Calculate the accounting rate of return based on the net initial investment. Assume straight-line depreciation.

3. You have the authority to make the purchase decision. Why might you be reluctant to base your decision on the DCF model?