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) 

 

    

 

Answer rating: 100% (QA)

The detailed answer for the above question is provided below Blue Ltd Machine Evaluation a Net Present Value NPV Analysis We need to calculate the NPV ... View the full answer