Your company needs a new machine. Two companies are selling this machine in the market, their conditions
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- Your company needs a new machine. Two companies are selling this machine in the market, their conditions are as below
- Company A: The purchase of the new machine at a cost of £18,000. The purchase price includes maintenance for the first three years, after that, maintenance will cost £1,000 a year (payable at the end of each year). The machine will have a useful life of seven years; after which time it is estimated it will have a scrap value of £3,000.
- Also, the machine will require a full refurbishment at the end of the fifth year costing an estimated £2,000 more. The expected income from the machine will be £1,500 at the end of the first year, £2,500 end of the second year, £4,000 end of the third year, £7,500 at the end of years 4 to 6, and £1,500 at the end of the seventh year.
- Company B: The purchase of the new machine at a cost of £10,000.
- The purchase price includes maintenance for the first two years, after that, maintenance will cost £1,000 a year (payable at the end of each year). The machine will have a useful life of seven years; after which time it is estimated it will have a scrap value of £1,000.
- The expected income from the machine will be £1,500 at the end of the first year, £2,000 end of the second year, £3,500 end of the third year, £5,000 at the end of years 4 to 6, and £500 at the end of the seventh year. Assuming the discount rate is 6%, using the three below methods develop investment appraisals and then write a brief report advising the company on which contract will be more profitable, whether it should be accepted and why. - Payback Method - Rate of Return - Net Present Value Remember to take all costs and cash availability.
How confident are you about your advice and under what circumstances might it change?
Related Book For
Managing Supply Chain and Operations An Integrative Approach
ISBN: 978-0132832403
1st edition
Authors: Thomas Foster, Scott E. Sampson, Cynthia Wallin, Scott W Webb
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