Question: Lunar Manufacturing is considering purchasing a new machine that costs GBP 500,000. The machine is expected to generate the following cash flows over its 5-year

Lunar Manufacturing is considering purchasing a new machine that costs GBP 500,000. The machine is expected to generate the following cash flows over its 5-year life:

  • Year 1: GBP 120,000
  • Year 2: GBP 130,000
  • Year 3: GBP 140,000
  • Year 4: GBP 150,000
  • Year 5: GBP 160,000

Requirements:

  1. Calculate the payback period.
  2. Determine the NPV using a discount rate of 6%.
  3. Compute the IRR.
  4. Calculate the ARR.
  5. Should Lunar Manufacturing invest in the new machine? Provide a detailed explanation based on your calculations.

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