QUESTION $1(25$ Marks$)$ West Ham Limited $is$ looking $to$ expand its operations and increase its market share $in$ the football industry. $To$ achieve this, they are looking $to$ increase its current productive capacity $of100000$ soccer balls a year $byat$ least $6\%$ for each $of$ the next $5$ years. $Itis$ considering two football making machines and $is$ unsure which $to$ purchase:

OPTION ONE: The football machine from Option One can $be$ imported $at$ a landed purchase cost $ofR200000.$ This machine $is$ expected $to$ last $5$ years after which the company intends $to$ keep the asset. Net cash flow from the sale $of$ the additional production $is$ expected $tobeR50000,R60000,R65000,R75000$ and $R40000$ respectively over the $5-$year lifespan $of$ the machine. This machine will enable West Ham Limited $to$ achieve $a4\%$ increase $in$ productive capacity.

OPTION TWO: The football machine from Option Two can $be$ purchased locally for $R200000$ and will also have a useful life $of5$ years. $It$ will not have any resale value $at$ the end $of$ the $5$ years and will $be$ disposed $of.$ Net cash inflows from additional production will amount $toR58000$ per annum for each $of$ the five years. This machine will enable West Ham Limited $to$ achieve $a2\%$ increase $in$ productive capacity. Additional information: $*$ West Ham Limited requires a return $on$ capital $of12\%$ for all investments made. The depreciation policy $isto$ depreciate all non$-$ current assets $on$ a straight$-$line basis. Assume that all cash flows occur $at$ the end $of$ each financial year except for the initial investment which occurs $in$ period $0.*$ The capital expenditure committee has indicated that $R400000is$ available for this capital expenditure. $In$ terms $of$ the company$s$ capital expenditure policy, only projects with a payback period $of$ less than four years are accepted. REQUIRED You are the financial manager $at$ West Ham Limited and have been asked $by$ the Board $of$ Directors $to$ advise them $on$ which machin$\frac{e}{s}to$ authorise for purchase.

Using appropriate capital budgeting techniques which must include the Payback Period, Net Present Value and Accounting Rate $of$ Return results $to$ compile a report $to$ the Board $of$ Directors detailing the option that should $be$ chosen.