Albert Trading Ltd, a quick expanding company is considering the replacement of its existing machine which is obsolete and unable to meet the rapidly rising demand for its products. The company is faced with two alternatives: Alternative A: To buy Machine Audi which is similar to the existing machine Alternative B: Go in for Machine Benz which is more expensive and has much greater capacity The cash flows at the present level of operations under the two alternatives are as follows: Year Machine Audi Machine Benz 0 (30500) (32000) 1 - 14500 2 9000 14500 3 19000 14500 4 16000 14500 5 14000 14500 The company estimates that its cost of capital is 11%. At the end of year 5, Machine Audi will have a scrap value of $2500 which is not included in the table above. Machine Benz will not have any residual value. Required: (a) Calculate the payback period for both machines. (answers must be expressed in years, months and days) (b) Calculate the discounted payback period for both machines (answers in years, months and days) (c) Calculate the net present value for both machines. (to the nearest dollar)  (d) Calculate the Profitability Index for Machine Audi.  (e) Calculate the Internal Rate of Return for both machines (Use interpolation to arrive at your final answer.)  (f) Write a brief report to the management to determine whether Albert Trading should buy any machine.

Cornerstones of Cost Management (Cornerstones Series)
4th Edition
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Author:Don R. Hansen, Maryanne M. Mowen
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Chapter19: Capital Investment
Section: Chapter Questions
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Albert Trading Ltd, a quick expanding company is considering the replacement of its existing machine
which is obsolete and unable to meet the rapidly rising demand for its products. The company is faced
with two alternatives:
Alternative A: To buy Machine Audi which is similar to the existing machine
Alternative B: Go in for Machine Benz which is more expensive and has much greater capacity
The cash flows at the present level of operations under the two alternatives are as follows:
Year Machine Audi Machine Benz
0 (30500) (32000)
1 - 14500
2 9000 14500
3 19000 14500
4 16000 14500
5 14000 14500
The company estimates that its cost of capital is 11%. At the end of year 5, Machine Audi will have a
scrap value of $2500 which is not included in the table above. Machine Benz will not have any
residual value.
Required:
(a) Calculate the payback period for both machines. (answers must be expressed in years, months
and days)
(b) Calculate the discounted payback period for both machines (answers in years, months and days)
(c) Calculate the net present value for both machines. (to the nearest dollar) 
(d) Calculate the Profitability Index for Machine Audi. 

(e) Calculate the Internal Rate of Return for both machines (Use interpolation to
arrive at your final answer.) 
(f) Write a brief report to the management to determine whether Albert Trading
should buy any machine.

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