MACHACHA PLC is a reputable company in the manufacturing industry and has a significant market share. The management of the company has identified the need to replace their machinery in the Production Department, with a view of enhancing its productivity. Two mutually exclusive models are being considered for investment, these being Model A and Model B. You are told that funds are only available for one proposal. This means the management of MACHACHA PLC has to make a choice between the proposals being considered for capital expenditure. The following details are available on the proposals: MODEL A MODEL B K000 K000 Initial Capital outlay 1000000 1500000 Projected Net Cash Flows: Year 1 480000 320000 ,, 2 200000 300000 ,, 3 200000 600000 ,, 4 100000 200000 ,, 5 300000 240000 ,, 6 160000 500000 Scrap value 40000 160000 The company’s cost of capital is 12%. It depreciates all its tangible non- current assets on straight line basis. It is the policy of the company not to add the scrap value to the net cash inflow at the end of each proposal’s economic life. REQUIRED: Calculate for both models The Payback period (Conventional or Traditional) in years to two decimal places The Net Present Value ( NPV) The Profitability Index (PI) to two decimal places
MACHACHA PLC is a reputable company in the manufacturing industry and has a significant market share. The management of the company has identified the need to replace their machinery in the Production Department, with a view of enhancing its productivity. Two mutually exclusive models are being considered for investment, these being Model A and Model B. You are told that funds are only available for one proposal. This means the management of MACHACHA PLC has to make a choice between the proposals being considered for capital expenditure. The following details are available on the proposals:
MODEL A MODEL B
K000 K000
Initial Capital outlay 1000000 1500000
Projected Net Cash Flows:
Year 1 480000 320000
,, 2 200000 300000
,, 3 200000 600000
,, 4 100000 200000
,, 5 300000 240000
,, 6 160000 500000
Scrap value 40000 160000
The company’s cost of capital is 12%. It
REQUIRED:
- Calculate for both models
- The Payback period (Conventional or Traditional) in years to two decimal places
- The
Net Present Value ( NPV) - The Profitability Index (PI) to two decimal places
- The Accounting
Rate of Return (ARR) to two decimal places
Internal Rate of Return (IRR) to two decimal places
b). Recommend to the management of MACHACHA PLC as to which proposal should be financed , giving your reasons
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