Stockton Manufacturing Limited found out that after using only 2 years a machine for semi automation process, a more advanced model is now available in the market. This more advanced model will produce more output with greater efficiency as compare to existing machine. The cost of existing machine is $32,000 with life of 10 years, at the end of which it can be scrapped. The current market value of machine is $15,000 and there is a prospective buyer available to purchase it.

The advanced model cost $123,500 with a useful life of 8 years and a scrap value of $20,500 at the end of life.

 The comparison of the two machines is as follows:

	EXISTING MACHINE	ADVANCED  MODEL
CAPACITY PER ANNUM	200,000 UNITS	230,000 UNITS
SALE PRICE PER UNIT ($)	0.95	0.95
LABOR COST PER UNIT ($)	0.12	0.08
MATERIAL COST PER UNIT ($)	0.48	0.46
FIXED OVERHEADS (ALLOCATION OF PORTION OF COMPANY’S FIXED OVERHEADS) ($)	0.24	0.16

 

The sales director is of the opinion that the additional output can be sold for $0.95. if the advanced model is used to produce 200,000 units per annum, the operators would be free for a proportionate time period for re-assignment to the other operations of the company.

The sales director has suggested that advanced model should be purchased by the company to replace the existing machine.

The cost of capital is 15%

Required:

Calculations comparing both old and new machine on the following bases:

1) Payback period

2) Net present value

3) Accounting rate of return