To solve this problem using the Net Present Value (NPV) method, we need to calculate the NPV of both Machine A and Machine B, given a target return on capital of 10%.

Step-by-Step Approach:

1. Initial Investment:

   • Both machines have an initial cost of Rs. 4,00,000.
   • Additional working capital of Rs. 30,000 is required at the end of the first year.

2. Expected Cash Flows (EAT):

   • The cash flows for Machine A and Machine B over the 5 years are provided in the table.

3. Discount Rate:

   • The company's target return on capital is 10%, which will be used as the discount rate to calculate the NPV.

NPV Calculation:

The formula for NPV is:

$\text{NPV} = \sum \left( \frac{\text{Cash Flow at Year } n}{(1 + r)^n} \right) - \text{Initial Investment}$

Where:

• $r$ is the discount rate (10% in this case).
• $n$ is the year (from 1 to 5).

Calculating the NPV for both machines:

Let me calculate the NPV for Machine A and Machine B based on the provided cash flows.The Net Present Values (NPV) for both machines are:

• Machine A: Rs. 91,745.47
• Machine B: Rs. 95,947.87

Conclusion:

Since the NPV for Machine B is higher than that of Machine A, Machine B is the more profitable choice based on the NPV method.

Would you like a detailed breakdown of the calculations or have any questions?

Additional Questions:

1. What is the significance of the NPV method in capital budgeting decisions?
2. How does the discount rate affect the NPV calculation?
3. Can you explain how sensitivity analysis might help in this decision?
4. What other factors might the company consider beyond NPV when choosing between these machines?
5. How would changes in the cost of capital affect the decision?

Tip:

Always compare the NPVs of different options when choosing between investments, as a higher NPV generally indicates a more profitable project.