Demoines Cleaners has the opportunity to invest in one of two dry cleaning machines. Machine A has a

 
   

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Demoines Cleaners has the opportunity to invest in one of two dry cleaning machines. Machine A has a four-year expected life and a cost of $30,000. It will cost an additional $6,500 to have the machine delivered and installed, and the expected residual value at the end of four years is $4,000. Machine B has a four-year expected life and a cost of $55,000. It will cost an additional $7,000 to have machine delivered and installed, and the expected residual value at the end of four years is $6,000. The company has a required rate of return of 14 percent. Additional cash flows related to the machines are as follows:

Machine A

Item

Year 1

Year 2

Year 3

Year 4

Labor savings

$25,000

$25,000

$25,000

$25,000

Power savings

1,500

1,500

1,500

1,500

Chemical savings

3,000

3,000

3,000

3,000

Additional maintenance costs

(1,200)

(1,200)

(1,200)

(1,200)

Additional miscellaneous costs

(2,500)

(2,500)

(2,500)

(2,500)

Machine B

Item

Year 1

Year 2

Year 3

Year 4

Labor savings

$32,000

$32,000

$32,000

$32,000

Power savings

2,000

2,000

2,000

2,000

Chemical savings

3.500

3,500

3,500

3,500

Additional maintenance costs

(1,500)

(1,500)

(1,500)

(1,500)

Additional miscellaneous costs

(2,700)

(2,700)

(2,700)

(2,700)

Required Compute the payback period for each of the two machines. Compute the net present value for each of the two machines. Determine the internal rate of return for each of the two machines. Which machine purchase do you recommend that the company pursue based on the results of your calculations?