14.17 Advanced: Replacement decision. Ceder Ltd has details of two machines that could fulfil the company's...

 

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14.17 Advanced: Replacement decision. Ceder Ltd has details of two machines that could fulfil the company's future production plans. Only one of these will be purchased. value at the The 'standard' model costs £50 000, and the 'de luxe' £88 000, payable immediately. Both machines would require he input of £10 000 working capital throughout their working lives, and both have no expected scrap end of their expected working lives of four years for the standard machine and six years for the de luxe machine. The forecast pre-tax operating net cash flows (£) associated with the two machines are Years hence Standard De luxe 5 a For both the standard and the de luxe machines calculate: (i) payback period; (ii) net present value. 6 ement ce the portunity umptions 19 Adv 1 2 3 4 20 500 22 860 24 210 25 380 23 410 25 940 32 030 26 110 38 560 35 100 The de luxe machine has only recently been introduced to the market, and has not been fully tested in operating conditions. Because of the higher risk involved, the appropriate discount rate for the de luxe machine is believed to be 14 per cent per year, 2 per cent higher than the discount rate for the standard machine. The company is proposing to finance the purchase of either machine with a term loan at a fixed interest rate of 11 per cent per year. Taxation at 35 per cent is payable on operating cash flows one year in arrears, and capital allowances are available at 25 per cent per year on a reducing balance basis. Required: operati 30 000. kely to Prc Recommend, with reasons, which of the two machines Ceder Ltd should purchase. (Relevant calculations must be shown.) (13 marks) b Surveys have shown that the accounting rate of return and payback period are widely used by companies in the capital investment decision process. Suggest reasons for the widespread use of these investment appraisal techniques. (6 marks) ACCA Level 3 Financial Management 14.17 Advanced: Replacement decision. Ceder Ltd has details of two machines that could fulfil the company's future production plans. Only one of these will be purchased. value at the The 'standard' model costs £50 000, and the 'de luxe' £88 000, payable immediately. Both machines would require he input of £10 000 working capital throughout their working lives, and both have no expected scrap end of their expected working lives of four years for the standard machine and six years for the de luxe machine. The forecast pre-tax operating net cash flows (£) associated with the two machines are Years hence Standard De luxe 5 a For both the standard and the de luxe machines calculate: (i) payback period; (ii) net present value. 6 ement ce the portunity umptions 19 Adv 1 2 3 4 20 500 22 860 24 210 25 380 23 410 25 940 32 030 26 110 38 560 35 100 The de luxe machine has only recently been introduced to the market, and has not been fully tested in operating conditions. Because of the higher risk involved, the appropriate discount rate for the de luxe machine is believed to be 14 per cent per year, 2 per cent higher than the discount rate for the standard machine. The company is proposing to finance the purchase of either machine with a term loan at a fixed interest rate of 11 per cent per year. Taxation at 35 per cent is payable on operating cash flows one year in arrears, and capital allowances are available at 25 per cent per year on a reducing balance basis. Required: operati 30 000. kely to Prc Recommend, with reasons, which of the two machines Ceder Ltd should purchase. (Relevant calculations must be shown.) (13 marks) b Surveys have shown that the accounting rate of return and payback period are widely used by companies in the capital investment decision process. Suggest reasons for the widespread use of these investment appraisal techniques. (6 marks) ACCA Level 3 Financial Management

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Answer A 1Payback period which is used most often in c... View the full answer