The directors of Joloss plc intend to purchase an additional machine to manufacture one of their new products. Two machines are being considered: Milligan and Bentine. The company depreciates its machinery using the straight-line method. 

Joloss plc will borrow the money required to purchase the machine and pay interest of 10% per annum on the loan. 

Estimates for the machines are as follows.

Note. These costs include the charges for depreciation and interest on the loans.

Required 

(i) Calculate the net present value of each machine. (Base your calculations on the cost of capital.) 

(ii) State, with your reason, which machine Joloss plc should purchase. The directors require the machine to produce a return on outlay of not less than 25%.

(iii) Calculate the internal rate of return on the machine you have selected in (ii) to see if it meets the required return on outlay.

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Cost of machine Additional receipts Year 1 2 Additional costs (see note) 3 4 Year 1 2 3 Milligan $ 100 000 70 000 80 000 90.000 90 000 750 000 60 000 65 000 1070 000 n Bentine $ 130 000 72 000 84 000 90,000 100 000 60 000 70 000 75 000 80 000