Question 4 (28 marks) Brian Ltd is considering investing N$350 000 in a new machine. Two...

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Question 4 (28 marks) Brian Ltd is considering investing N$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 N$50 000, and that of B N$70 000. The accounting profits (after charging straight-line depreciation) for each machine are estimated to be: A B Year N$000 N$000 1 110 80 2 110 110 3 160 150 4 5 160 170 100 90 The company has an annual cost of capital of 8%. Discount factors for 8%: Year 1 0.926 2 0.857 3 0.794 4 0.735 5 0.681 Mark Requirement Evaluate each machine using NPV 4.2 Evaluate each machine using Payback period 4.3 Advise Brian Ltd (giving reasons) as to which machine to purchase. Sub- Total total 14 14 4 18 8 4 222 22 A further method of evaluation is the Internal Rate of Return. State briefly 4.4 how the Internal Rate of Return is calculated and its significance (you are not required to calculate the Internal Rate of Return) 3 25 4.5 Explain how sensitivity analysis can help to refine capital investment decisions Total 3 28 28 Question 4 (28 marks) Brian Ltd is considering investing N$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 N$50 000, and that of B N$70 000. The accounting profits (after charging straight-line depreciation) for each machine are estimated to be: A B Year N$000 N$000 1 110 80 2 110 110 3 160 150 4 5 160 170 100 90 The company has an annual cost of capital of 8%. Discount factors for 8%: Year 1 0.926 2 0.857 3 0.794 4 0.735 5 0.681 Mark Requirement Evaluate each machine using NPV 4.2 Evaluate each machine using Payback period 4.3 Advise Brian Ltd (giving reasons) as to which machine to purchase. Sub- Total total 14 14 4 18 8 4 222 22 A further method of evaluation is the Internal Rate of Return. State briefly 4.4 how the Internal Rate of Return is calculated and its significance (you are not required to calculate the Internal Rate of Return) 3 25 4.5 Explain how sensitivity analysis can help to refine capital investment decisions Total 3 28 28

Answer rating: 100% (QA)

SOLUTION Question 4 41 Net Present Value NPV To calculate the NPV of each machine we need to discount the estimated accounting profits to their present value using the discount factors for 8 Machine A ... View the full answer