LMN Ltd. is deciding between two machines for its production line. The machines have the following characteristics:

• Machine C:
  • Cost: $500,000
  • Expected life: 5 years
  • Annual Income before Depreciation & Tax: $120,000
• Machine D:
  • Cost: $650,000
  • Expected life: 6 years
  • Annual Income before Depreciation & Tax: $150,000

Requirements:

1. Calculate the payback period.
2. Calculate the NPV for both machines using a cost of capital of 10%.
3. Calculate the IRR for both machines.
4. Suggest which machine should be purchased.