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What advice mehra limited on which proposal to invest

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Reference no: EM132485140

Mehra limited is considering whether to invest in one of the 2 machines, A or B of which give rise to manpower and other cost savings over the existing manual process. The relevant data relating to each of the machines is given in the following table:

                                                                   Machines A (rupees)                       Machine B (rupees)

Investment outlay (payable immediately)              (100,000)                                      (120,000)

Year 1 annual cost savings                                60,000                                             50,000

Year 2 annual cost savings                                50,000                                            45,000

Year 3 annual savings                                     40,000                                             40,000

Year 4 annual savings                                     20,000                                            35,000

  • The required rate of return is 15% per annum.

Required;

Question 1: Advice Mehra limited on which proposal to invest in using the NPV method

Question 2: Further discussion with the machine's Supplier revealed that machine A has a salvage value of rupees 10,000 and machine B has a salvage value of rupees 40,000. Advice the management of Mehra limited on the best proposal after incorporating the new information above.

Reference no: EM132485140

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