the Payback Period of Machine A (expressed in years, mo the Net Present Value of both machines. Accounting Rate of Return on initial investment (expressed f both machines. the Internal Rate of Return of Machine B (expressed to tw value of money is taken into account, which machine sho Lomax Ltd intend expanding the company and they have t
the Payback Period of Machine A (expressed in years, mo the Net Present Value of both machines. Accounting Rate of Return on initial investment (expressed f both machines. the Internal Rate of Return of Machine B (expressed to tw value of money is taken into account, which machine sho Lomax Ltd intend expanding the company and they have t
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
![QUESTION 4
REQUIRED
Calculate the Payback Period of Machine A (expressed in years, months and days).
Calculate the Net Present Value of both machines.
Calculate the Accounting Rate of Return on initial investment (expressed to two decimal
places) of both machines.
Calculate the Internal Rate of Return of Machine B (expressed to two decimal places).
If the time value of money is taken into account, which machine should be chosen? Why?
INFORMATION
The directors of Lomax Ltd intend expanding the company and they have the choice of purchasing one of two
machines at the end of 2022 viz. Machine A or Machine B. Both machines have a five-year life, with only Machine
A having a residual value of R300 000. The annual volume of production of each machine is estimated at 6 000
pallets (comprising 500 bricks each), which can be sold at R520 per pallet. Depreciation is calculated on the
machines using the straight-line method.
Machine A costs R4 800 000 excluding installation cost of R300 000. The annual variable costs are estimated
at R1 100 000. A major overhaul at a cost of R200 000 is expected to be undertaken at the end of year three.
Fixed costs are estimated at R500 000 (excluding depreciation).
Machine B costs R5 100 000 including installation costs of R400 000. Its annual variable costs are estimated
at R1 050 000. Fixed costs are the same as for Machine A.
The cost of capital may be assumed to be 14%.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F09308bb6-1136-428b-a51a-16c7742adb9a%2F3fcd4ee6-8538-483b-b0a0-b80fd31dc2a9%2Flxu4eaj_processed.png&w=3840&q=75)
Transcribed Image Text:QUESTION 4
REQUIRED
Calculate the Payback Period of Machine A (expressed in years, months and days).
Calculate the Net Present Value of both machines.
Calculate the Accounting Rate of Return on initial investment (expressed to two decimal
places) of both machines.
Calculate the Internal Rate of Return of Machine B (expressed to two decimal places).
If the time value of money is taken into account, which machine should be chosen? Why?
INFORMATION
The directors of Lomax Ltd intend expanding the company and they have the choice of purchasing one of two
machines at the end of 2022 viz. Machine A or Machine B. Both machines have a five-year life, with only Machine
A having a residual value of R300 000. The annual volume of production of each machine is estimated at 6 000
pallets (comprising 500 bricks each), which can be sold at R520 per pallet. Depreciation is calculated on the
machines using the straight-line method.
Machine A costs R4 800 000 excluding installation cost of R300 000. The annual variable costs are estimated
at R1 100 000. A major overhaul at a cost of R200 000 is expected to be undertaken at the end of year three.
Fixed costs are estimated at R500 000 (excluding depreciation).
Machine B costs R5 100 000 including installation costs of R400 000. Its annual variable costs are estimated
at R1 050 000. Fixed costs are the same as for Machine A.
The cost of capital may be assumed to be 14%.
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 4 steps
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
![FINANCIAL ACCOUNTING](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781259964947/9781259964947_smallCoverImage.jpg)
![Accounting](https://www.bartleby.com/isbn_cover_images/9781337272094/9781337272094_smallCoverImage.gif)
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
![Accounting Information Systems](https://www.bartleby.com/isbn_cover_images/9781337619202/9781337619202_smallCoverImage.gif)
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
![FINANCIAL ACCOUNTING](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781259964947/9781259964947_smallCoverImage.jpg)
![Accounting](https://www.bartleby.com/isbn_cover_images/9781337272094/9781337272094_smallCoverImage.gif)
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
![Accounting Information Systems](https://www.bartleby.com/isbn_cover_images/9781337619202/9781337619202_smallCoverImage.gif)
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
![Horngren's Cost Accounting: A Managerial Emphasis…](https://www.bartleby.com/isbn_cover_images/9780134475585/9780134475585_smallCoverImage.gif)
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
![Intermediate Accounting](https://www.bartleby.com/isbn_cover_images/9781259722660/9781259722660_smallCoverImage.gif)
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
![Financial and Managerial Accounting](https://www.bartleby.com/isbn_cover_images/9781259726705/9781259726705_smallCoverImage.gif)
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education