INFORMATION Niterra Limited intends purchasing a new machine and has a choice between the following two machines: Machine A Machine B Initial cost R400 000 R400 000 Expected useful life 5 years 5 years Scrap value 0 0 Expected net profit or net cash flows Net profit Net cash flows Year 1 R20 000 R116 000 Year 2 R40 000 R116 000 Year 3 R50 000 R116 000 Year 4 R70 000 R116 000 Year 5 0 R116 000 The company estimates that its cost of capital is 12%. Depreciation is estimated at R80 000 per year.

Use the information provided above to answer the following questions. Where applicable, use the present value tables provided in APPENDICES 1 and 2 that appear after QUESTION 5. 5.1 Calculate the Payback Period of both machines (expressed in years, months and days.) (4 marks) 5.2 Which machine should be chosen on the basis of payback period only? Why? (1 marks)