TGM Limited is considering the purchase of a machine. The company desires to finance the project...

 

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TGM Limited is considering the purchase of a machine. The company desires to finance the project by taking a loan having an interest of 12% per annum. It has 2 alternatives as follows: Machine ASX The machine will cost $800 000 plus installation costs of $100 000 and is expected to have a useful life of five years. The machine is expected to have a salvage (residual) value of $40 000. The machine is expected to increase revenues by $390 000 per year but will require the employment of two new machine operators at $45 000 per year for each operator, and it will require maintenance and repairs averaging $22 000 per year. Machine BTM The machine will cost $ 700 000 and will have a net annual cash flow of $220 000 during the first year which is expected to grow by 10% over each previous year until the end of the useful life of 5 years. However there will be no residual value for Machine BTM at the end of its useful life. Before taking a final decision, the directors of TGM Limited want to make a comparison of the two alternatives based upon: (a) The payback period (b) The Net Present Value (c) The Internal Rate of Return (d) The Discounted Payback period (e) The profitability Index You are required to prepare a report to the management of TGM Limited providing a useful advice about the right decision. TGM Limited is considering the purchase of a machine. The company desires to finance the project by taking a loan having an interest of 12% per annum. It has 2 alternatives as follows: Machine ASX The machine will cost $800 000 plus installation costs of $100 000 and is expected to have a useful life of five years. The machine is expected to have a salvage (residual) value of $40 000. The machine is expected to increase revenues by $390 000 per year but will require the employment of two new machine operators at $45 000 per year for each operator, and it will require maintenance and repairs averaging $22 000 per year. Machine BTM The machine will cost $ 700 000 and will have a net annual cash flow of $220 000 during the first year which is expected to grow by 10% over each previous year until the end of the useful life of 5 years. However there will be no residual value for Machine BTM at the end of its useful life. Before taking a final decision, the directors of TGM Limited want to make a comparison of the two alternatives based upon: (a) The payback period (b) The Net Present Value (c) The Internal Rate of Return (d) The Discounted Payback period (e) The profitability Index You are required to prepare a report to the management of TGM Limited providing a useful advice about the right decision.