A year ago, Robin plc invested in a machine to improve the manufacturing of one of its products. It has just discovered that a new machine has come onto the market which would improve performance more than the one it bought. The first machine cost €8000 a year ago, and is depreciated on a straight-line basis over 8 years (the same period as its useful life, after which it will be scrapped). If it were sold now, the company would get around €5000 (tax credit on the capital loss would be 40%).

The new machine costs €11 000 and would be depreciated for €10 500 on a straight-line basis over its useful life, estimated at 7 years. It could be sold at the end of its useful life for €500, which is what its book value would be.

The company is hoping to produce 100 000 units of its product annually for the next 7 years. With the equipment currently in use, the company's per unit cost price breaks down as follows: €0.14 per unit in direct labour costs, €0.10 for raw materials and €0.14 in general costs. The new machine will enable the company to cut direct labour costs to €0.12 per unit produced. The cost of raw materials will drop to €0.09 per unit thanks to a reduction in waste. General costs will remain at €0.14 per unit. All other factors will remain unchanged, in particular supplies, energy consumed and maintenance costs. profits are taxed at 40%.

(a) Draw up the cash flow schedule for the contemplated investment.

(b) Calculate the discounted payback ratio on this investment.

Answer rating: 100% (QA)

a A Heres the cash flow schedule for the contemplated investment Year 0 11000 investment in n... View the full answer