Polly plc is considering the purchase of two alternative machines. The purchase of either will increase production. The purchase price of machine ‘A’ is £12,000 and the estimated cash flows from the machine are as follows:

Year 1 2 3

Cash flow (£) 8,400 3,000 3,000

Machine ‘A’ also has disposal value of £1,500. The purchase price of machine ‘B’ is £30,000 and the estimated cash flows from the machine are as follows:

Year 1 2 3

Cash flow (£) 10,000 10,000 20,000

Machine ‘B’ also has a disposal value of £5,000.

Calculate the Internal Rate of Return, Payback Period, the Net Present Value and the Accounting Rate of Return for both investments. The appropriate discount rate is 12%. Both machines will be depreciated by the straight line method over 3 years. On the basis of your results indicate which machine you recommend Polly plc purchase.