ABTS Co Ltd is considering the purchase of a new machine. Two alternative machines (A and B) have been suggested each having an initial cost of R400 000 and requiring R20 000 as additional working capital at the end of the 1st year Earnings after taxation are expected to be as follows. All cash flows are expected at the end of each period. Year1 Year 2 Year 3 Year 4 Year 5 Machine A R40 000 R120 000 R160 000 R240 000 R160 000 Machine B R120 000 R160 000 R200 000 R120 000 R80 000 The company has target return on capital of 10% and on this basis, you are required to compare the profitability of the machines and state which alternatives you consider financially preferable using the i) Payback, ii) Net Present Value and ii) Internal Rate of Return methods.
ABTS Co Ltd is considering the purchase of a new machine. Two alternative machines (A and B) have been suggested each having an initial cost of R400 000 and requiring R20 000 as additional working capital at the end of the 1st year Earnings after taxation are expected to be as follows. All cash flows are expected at the end of each period. Year1 Year 2 Year 3 Year 4 Year 5 Machine A R40 000 R120 000 R160 000 R240 000 R160 000 Machine B R120 000 R160 000 R200 000 R120 000 R80 000 The company has target return on capital of 10% and on this basis, you are required to compare the profitability of the machines and state which alternatives you consider financially preferable using the i) Payback, ii) Net Present Value and ii) Internal Rate of Return methods.
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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Transcribed Image Text:ABTS Co Ltd is considering the purchase of a new machine. Two alternative machines (A
and B) have been suggested each having an initial cost of R400 000 and requiring R20 000
as additional working capital at the end of the 1st year Earnings after taxation are expected
to be as follows. All cash flows are expected at the end of each period.
Year1
Year 2
Year 3
Year 4
Year 5
Machine A
R40 000
R120 000
R160 000
R240 000
R160 000
Machine B
R120 000
R160 000
R200 000
R120 000
R80 000
The company has target return on capital of 10% and on this basis, you are required to
compare the profitability of the machines and state which alternatives you consider financially
preferable using the i) Payback, ii) Net Present Value and ii) Internal Rate of Return methods.
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