QUESTION 3

INFORMATION

Avery Manufacturers intends purchasing a new machine and has a choice between two machines viz. Machine A or Machine B. The cost of each machine is R3 000 000, with each having an expected useful life of five years. Machine A is expected to have a scrap value of R200 000. No scrap value is expected for Machine B. Avery Manufacturers uses the straight-line method of deprecation. The cost of capital is estimated at 16%.

Machine A is expected to generate the following net profits over its useful life:

Year 1 R340 000

Year 2 R280 000

Year 3 R550 000

Year 4 R340 000

Year 5 R160 000

Machine B is expected to generate a net profit of R340 000 per year over the five -year period. Ignore taxes.

REQUIRED:

Answer the questions based on the information supplied.

Use the information provided below to calculate the following. Where applicable, use the four-decimal present value tables provided in APPENDICES 1 and 2

3.1 Accounting Rate of Return (on initial investment) of Machine A (expressed to two decimal places) (5 marks)

3.2 Net Present Value of each machine (8 marks)

3. 3 Internal Rate of Return of Machine B (expressed to two decimal places) using interpolation. (7 marks)

3.4 Payback period for of Machine A (5 marks)