ABTS Co Ltd is considering the purchase of a new machine. Two alternative machines (Aand B) have been suggested each having an initial cost of R400 000 and requiring R20 000as additional working capital at the end of the 1st year Earnings after taxation are expectedto be as follows. All cash flows are expected at the end of each period.Year1Year 2Year 3Year 4Year 5Machine AR40 000R120 000R160 000R240 000R160 000Machine BR120 000R160 000R200 000R120 000R80 000The company has target return on capital of 10% and on this basis, you are required tocompare the profitability of the machines and state which alternatives you consider financiallypreferable using the i) Payback, ii) Net Present Value and ii) Internal Rate of Return methods.

Payback period, NPV and IRR can be computed as follows:

Answered: ABTS Co Ltd is considering the purchase…

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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