An industry is considering purchasing one of four alternative machines for its production process needs. The characteristics
Question:
An industry is considering purchasing one of four alternative machines for its production process needs. The characteristics of each investment are shown in the table below. The minimum acceptable rate of return set by the company for this type of investment is 8%. Annual revenues are calculated at the end of the corresponding year, while the production process is expected to take place over a long period of time.
Machine | A | B | C | D |
Cost | 50.000 | 50.000 | 100.000 | 100.000 |
Revenue yearly | 12.000 | 12.000 | 24.000 | 24.000 |
Residual value | 10.000 | 10.000 | 20.000 | 20.000 |
Life span | 5 | 10 | 5 | 10 |
(a) Select the most economically optimal machine based on the following criteria:
(i) present value;
(ii) equivalent annual value;
(iii) internal rate of return;
(iv) repayment period.
(b) Assuming that the above machines are used in different production processes, which means that more of them (one of each type) can be procured. If the amount available for investment in mechanical equipment of the business is €200,000, which machine(s) should be purchased.
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill