... Initial Investment Cost Annual Operating Savings Example using payback method, Facts: A company is considering the purchase of one of the machines below: Table 1.1 Machine A Machine B Cost of new machine £240,000 £240,000 Annual net cash inflow £60,000 £80,000 From the table 1.1, the payback period for A would be 4years, for B would be 3years. Now consider the estimated useful lives of the two alternatives. Suppose that the useful life of B is only 3 years. It is use will merely cover its cost and provide no profits. But A has useful life of 6 years. It will generate net cash inflows for two years beyond its payback period, which will give the company an additional net cash inflow of £120,000(£60,000 at 2 years). Unlike B, A will be profitable. In light of the assets useful lives, A appears to be the better investment. Accounting Rate of Return (ARR) It is an accounting ratio ...

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