Emerald Limited has the choice of purchasing one of two machines viz. Machine X and Machine Y but funding is available to invest in only one of them (if at all). Each machine costs R10 000 000 and a useful life of five years is anticipated. The residual value of each machine is estimated to be R1 000 000. The annual volume of production for each machine is estimated to be 150 000 units, which can be sold for cash at R48 per unit. Depreciation is calculated on the machines using the straight-line method over their respective useful lives. Annual cash operating costs are as follows: 

                                           Machine X              Machine Y 

Variable costs per unit     R6.00                        R4.80 

Fixed costs (total)         R3 000 000              R3 200 000 

The cost of capital is expected to be 15%. Study the information provided below and answer the following questions:

Use the Net Present Value technique to determine the machine that the company should purchase.
Calculate the Accounting Rate of Return (on initial investment) of Machine X.

Answer rating: 100% (QA)

To determine which machine Emerald Limited should purchase we will calculate the Net Present Value NPV for each machine and compare them The machine with the higher NPV will be the recommended choice ... View the full answer