Use the information provided below to answer the following questions: 5.1 Calculate the Payback Period of Machine B (expressed in vears, months and days). 5.2 Calculate the Accounting Rate of Return (on average investment) of both machines (expressed to two decimal places). 5.3 Calculate the Net Present Value of each machine. 5.4 Which machine should be chosen if the time value of money is taken into-account? Why? 5.5 Calculate the Internal Rate of Return of Machine B using interpolation (expressed to two decimal places), if the net cash flows are R140 000 per year for five years. INFORMATION Salsa Limited intends purchasing a new machine and has a choice between two machines, of which only one can be chosen. The following information pertaining to the two machines is available: Machine A Machine B Initial cost R500 000 R500 000 Cost of capital 14% 14% Expected economic life 5 years 5 years Expected disposal value R50 000 Depreciation per year R90 000 R100 000 Expected net profit Year 1 R50 000 R60 000 Year 2 R60 000 R60 000 Year 3 R70 000 R60 000 Year 4 R80 000 R60 000 Year 5 R20 000 R60 000
Use the information provided below to answer the following questions: 5.1 Calculate the Payback Period of Machine B (expressed in vears, months and days). 5.2 Calculate the Accounting Rate of Return (on average investment) of both machines (expressed to two decimal places). 5.3 Calculate the Net Present Value of each machine. 5.4 Which machine should be chosen if the time value of money is taken into-account? Why? 5.5 Calculate the Internal Rate of Return of Machine B using interpolation (expressed to two decimal places), if the net cash flows are R140 000 per year for five years. INFORMATION Salsa Limited intends purchasing a new machine and has a choice between two machines, of which only one can be chosen. The following information pertaining to the two machines is available: Machine A Machine B Initial cost R500 000 R500 000 Cost of capital 14% 14% Expected economic life 5 years 5 years Expected disposal value R50 000 Depreciation per year R90 000 R100 000 Expected net profit Year 1 R50 000 R60 000 Year 2 R60 000 R60 000 Year 3 R70 000 R60 000 Year 4 R80 000 R60 000 Year 5 R20 000 R60 000
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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Transcribed Image Text:Use the information provided below to answer the following questions:
5.1
Calculate the Payback Period of Machine B (exoressed in years, months and days).
5.2
Calculate the Accounting Rate of Return (on average investment) of both machines (expressed to
two decimal places).
5.3
Calculate the Net Present Value of each machine.
5.4
Which machine should be chosen if the time value of money is taken into account? Why?
5.5
Calculate the Internal Rate of Return of Machine B using interpolation (expressed to two decimal
places), if the net cash flows are R140 000 per year for five years.
INFORMATION
Salsa Limited intends purchasing a new machine and has a choice between two machines, of which only one can be
chosen. The following information pertaining to the two machines is available:
Machine A
Machine B
Initial cost
R500 000
R500 000
Cost of capital
14%
14%
Expected economic life
5 years
5 years
Expected disposal value
R50 000
Depreciation per year
R90 000
R100 000
Expected net profit
Year 1
R50 000
R60 000
Year 2
R60 000
R60 000
Year 3
R70 000
R60 000
Year 4
R80 000
R60 000
Year 5
R20 000
R60 000
+
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