Calculate the:

- net cash flow for each year

- the payback period

- the accounting rate of return to two decimal places.

Source B1 Gerry manufactures a product using Machine B. The following budgeted information is available in respect of this for the year ending 31 December 2019. Total annual cash inflows from sales Total annual cash outflows for cost of sales 800 000 416 000 Gerry has decided to purchase a new machine, Machine X, at a cost of $600 000, to replace Machine B on 1 January 2020. The new machine will have a useful life of 3 years with no residual value. It is expected that Machine X will produce the following results: 1 Each year sales will be 5% more than the sales in the previous year. 2 Gross margin will increase by 2% in 2020 and this gross margin will then remain constant. 3 Machine maintenance costs will be: 2020 2021 2022 10 000 20 000 30 000 4 Other operating costs (excluding depreciation) will be $120 000 per year. Answer the following questions in the Question Paper. Questions are printed here for reference only. (a) Calculate for Machine X: (i) the net cash flow for each year (ii) the payback period (iii) the accounting rate of return to two decimal places. (b) State two advantages and two disadvantages of using the payback method of investment appraisal. [4] Additional information Gerry's cost of capital is 10%. The relevant discount factors are: Year 1 Year 2 Year 3 0.909 0.826 0.751 (c) Calculate the net present value (NPV) of Machine X. [3] (d) Advise Gerry whether or not he should purchase Machine X. Justify your answer using two financial and two non-financial factors. [5] Source B1 Gerry manufactures a product using Machine B. The following budgeted information is available in respect of this for the year ending 31 December 2019. Total annual cash inflows from sales Total annual cash outflows for cost of sales 800 000 416 000 Gerry has decided to purchase a new machine, Machine X, at a cost of $600 000, to replace Machine B on 1 January 2020. The new machine will have a useful life of 3 years with no residual value. It is expected that Machine X will produce the following results: 1 Each year sales will be 5% more than the sales in the previous year. 2 Gross margin will increase by 2% in 2020 and this gross margin will then remain constant. 3 Machine maintenance costs will be: 2020 2021 2022 10 000 20 000 30 000 4 Other operating costs (excluding depreciation) will be $120 000 per year. Answer the following questions in the Question Paper. Questions are printed here for reference only. (a) Calculate for Machine X: (i) the net cash flow for each year (ii) the payback period (iii) the accounting rate of return to two decimal places. (b) State two advantages and two disadvantages of using the payback method of investment appraisal. [4] Additional information Gerry's cost of capital is 10%. The relevant discount factors are: Year 1 Year 2 Year 3 0.909 0.826 0.751 (c) Calculate the net present value (NPV) of Machine X. [3] (d) Advise Gerry whether or not he should purchase Machine X. Justify your answer using two financial and two non-financial factors. [5]