Thomson Ltd., a food manufacturer, is considering purchasing a new machine for £300,000. The annual running costs are expected to be £20,000 plus straight line depreciation charge. The machine is expected to last for 4 years, after which the machine will be scrapped for an estimated amount of 20% of the original cost. The annual revenue is forecasted to be £80,000 and the cost of capital is 10 %.

You are required to

(a) Advise the management of Thomson Ltd whether or not it will be economically feasible to invest in the new machine in the light of the four different investment appraisal methods covered in this module.

(b) Critically comment on the results you obtained in (a) above referring to the pros and cons of each evaluation method.

Answer rating: 100% (QA)

Initial investment 30000000 Expected Annual Cost 2000000 Forecasted Annual Revenue 8000000 Scrap Value of the Machine 6000000 Annual Depreciation Charge 6000000 Life of the Project 4 Years NPV Year 0 ... View the full answer