Larco Ltd. is considering investing in a new machine and has reduced the options to one of two types of machinery. Both machines will have a five-year life and have zero salvage value at the end of five years. Larco has a 10 percent cost of capital.

Required:
1. Compute the net present value for each machine. Which machine do you recommend Larco purchase based on the NPV?
2. Compute the profitability index for each machine. Which machine do you recommend Larco purchase based on the PI?
3. Why do the rankings of the machines differ in Requirements 1 and 2? Considering the results from Requirements 1 and 2, which machine do you recommend that Larco purchase? Briefly discuss your recommendation.

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Machine A Machine B Initial investment in machinery Annual cost savings $340,000 100,000 $200,000