ABC Ltd. is considering the purchase of a new equipment, machine X and Y to be used in a project. The funds to facilitate the purchase of the machines and the execution of the project will be generated from: 1 million $1 Ordinary Shares with a market value of $1.00 per share and an estimated cost of 8% 1 million $1 Preference shares with a market value of 80cents and an estimated cost of 10% 5 million Debenture stock with a market value of $90 per 100 nominal value and an estimated cost of 5% The following details were estimated for both machines: Machine X Machine Y Cost $1,000,000 $1,000,000 Estimated residual value $200,000 $200,000 Estimated life 4 years 4 years Estimated future profits before depreciation Year 1 $500,000 $200,000 2 $500,000 $300,000 3 $300,000 $500,000 4 $100,000 $500,000 Which machine would be purchased using the payback period? Why?
ABC Ltd. is considering the purchase of a new equipment, machine X and Y to be used in a project. The funds to facilitate the purchase of the machines and the execution of the project will be generated from: 1 million $1 Ordinary Shares with a market value of $1.00 per share and an estimated cost of 8% 1 million $1 Preference shares with a market value of 80cents and an estimated cost of 10% 5 million Debenture stock with a market value of $90 per 100 nominal value and an estimated cost of 5% The following details were estimated for both machines: Machine X Machine Y Cost $1,000,000 $1,000,000 Estimated residual value $200,000 $200,000 Estimated life 4 years 4 years Estimated future profits before depreciation Year 1 $500,000 $200,000 2 $500,000 $300,000 3 $300,000 $500,000 4 $100,000 $500,000 Which machine would be purchased using the payback period? Why?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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ABC Ltd. is considering the purchase of a new equipment, machine X and Y to be used in a project. The funds to facilitate the purchase of the machines and the execution of the project will be generated from:
- 1 million $1 Ordinary Shares with a market value of $1.00 per share and an estimated cost of 8%
- 1 million $1
Preference shares with a market value of 80cents and an estimated cost of 10% - 5 million Debenture stock with a market value of $90 per 100 nominal value and an estimated cost of 5%
The following details were estimated for both machines:
Machine X Machine Y
Cost $1,000,000 $1,000,000
Estimated residual value $200,000 $200,000
Estimated life 4 years 4 years
Estimated future profits before
Year 1 $500,000 $200,000
2 $500,000 $300,000
3 $300,000 $500,000
4 $100,000 $500,000
- Which machine would be purchased using the payback period? Why?
- Using the ARR method, which of the two machines would be purchased? Explain
- Based on the
Net Present Value for each project, explain which machine would be selected.
- Discuss the use of net present value as a method of long term investment appraisal.
- What is the
internal rate of return on both machines?
- Discuss the use of the internal rate of return as the basis for selecting the preferred machine for long term investment.
- Explain the meaning of the profitability index.
Explain which is the most appropriate method to use for selecting the preferred machine for the project.
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