Question

Beta were introduced, each having an initial cost of SR 350,000 and needing SR 25.000 as additional working capital at the end of the first year. Earnings after tax are expected to be as follows:

Years	Cash Inflows Machine Alpha	Cash Inflows Machine Beta
1	50,000 SR	110,000 SR
2	110,000 SR	150,000 SR
3	150,000 SR	200,000 SR
4	230,000 SR	110,000 SR
5	150,000 SR	90,000 SR

The company is targeting a return on capital of 15% and on this basis you are required to compare the profitability of the machines and the state of which alternative you consider to be financially preferable. The present value of 1 SR at 15% is 0.95, 0.82, 0.75, 0.70 and 0.65 for the first to fifth year respectively.

Solution:

--------------------------------------------------------

Answer 1

​​​​​​As the Alpha Machine's Net present value (NPV) And Profitable Index (PI) both are positive and more than the Beta machine.

Therefore it is better to opt the Alpha Machine instead of Beta Machine.