ABC Company is considering the purchase of new machinery for its production line. The company can purchase either a basic model or a deluxe model. The basic model costs $100,000 and has an expected life of five years. It will generate annual net cash flows of $30,000. The deluxe model costs $150,000 and has an expected life of six years. It will generate annual net cash flows of $40,000. ABC Company requires a return of 10% on all investments.

a) Calculate the payback period for both the basic model and the deluxe model.
b) Calculate the net present value (NPV) for both models and state which model should be chosen based on NPV.

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