Sage plc is considering investing in a new machine. The machine would cost £500,000, have a life of 5 years and a nil residual value. The company uses a straight-line method of depreciation. It is expected that the machine will earn the following
Sage plc is considering investing in a new machine. The machine would cost £500,000, have a life of 5 years and a nil residual value. The company uses a straight-line method of
Year.
1
2
3
4
5
The above profits also represent the extra net cash flows expected to be generated by the machine (i.e. they exclude the machine’s initial cost and the annual depreciation charge). The company’s cost of capital is 9%.
|
Profits £000 for each year |
|
200 |
|
120 |
|
120 |
|
100 |
|
60 |
Calculate:
-
(i) The machine’s payback period; and
-
(ii) The
net present value of the machine investment.
Advise managment whether the new machine should be purchased.
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