The Department of Transport is considering the purchase of a trench digger machine capable of performing work now done manually. There are two options:
- Machine 1 will cost R100 000 and will last for three years. Use of the machine will reduce labour costs by R36 000 per year.
- Machine 2 will cost R140 000 and will last four years and will reduce labour costs by R40 000 per year.
The predetermined discount rate required is 12%. Which machine should be purchased, based on the payback method?
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