Antara Ltd. is considering the purchase of a new machine for the production of latex. The machine costs $500,000. The machine will be usable for ten years, at which time it will become worthless. Antara plans to update to a new model in five years when it will be sold for $100,000. Annual revenues from the new machine are expected to be $130,000 per year for the first four years of use and $95,000 in Year 5. The company uses the straight-line depreciation method for its non-current assets. The company's cost of capital is 10%. Required: a) Calculate the Accounting Rate of Return (ARR) for the new machine. (Round your answer to two decimal places). b) Calculate the Payback Period for the new machine (Round your answer to two decimal places). c) Calculate the Net Present Value (NPV) for the new machine. Show your workings.

Antara Ltd. is considering the purchase of a new machine for the production of latex. The machine costs $500,000. The machine will be usable for ten years, at which time it will become worthless. Antara plans to update to a new model in five years when it will be sold for $100,000. Annual revenues from the new machine are expected to be $130,000 per year for the first four years of use and $95,000 in Year 5. The company uses the straight-line depreciation method for its non-current assets. The company's cost of capital is 10%. Required: a) Calculate the Accounting Rate of Return (ARR) for the new machine. (Round your answer to two decimal places). b) Calculate the Payback Period for the new machine (Round your answer to two decimal places). c) Calculate the Net Present Value (NPV) for the new machine. Show your workings.

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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The annual operating costs of Machine A are $2,000. The machine will perform satisfactorily over the next five years and has an estimated market value (MV) of $3,000 at the end of its useful life. A salesperson for another company is offering a replacement, Machine B, for $14,000, with a MV of $1,400 after five years. Annual operating costs for Machine B will only be $1,500. It is believed that $10,000 could be obtained for the old machine A if it were sold now. If the before-tax MARR is 11% per year, determine whether the old machine A should be replaced by the new machine B.
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