Blue Ltd is considering investing $ 350,000 in a new machine. Two alternatives, A
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Question:
Blue Ltd is considering investing $350,000 in a new machine. Two alternatives,
A and B, are being considered. Both machines would have a useful life of five
years, at the end of which the residual value of A would be $50,000, and that of
B $70,000.
The accounting profits (after charging straight-line depreciation) for each
machine are estimated to be:
A B
($000)
Year 111080
2110110
3160150
4160170
510090
The company has an annual cost of capital of 8%.
Discount factors for 8%:
Year 1.926
2.857
3.794
4.735
5.681
You are required to
(a) Evaluate each machine Net Present Value (NPV. Payback
(b) Advise Blue Ltd (giving reasons) as to which machine to purchase (3 marks)
(c) A further method of evaluation is the Internal Rate of Return. State briefly how the Internal Rate of Return is calculated and its significance (you are not required to calculate the Internal Rate of Return)
Related Book For
College Accounting Chapters 1-30
ISBN: 978-1259631115
15th edition
Authors: John Price, M. David Haddock, Michael Farina
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