a) A project requires the purchase of a new piece of machinery. You are the project manager and must choose between three potential machines (Machine A, Machine B and Machine C), either of which would be suitable. The cost of each machine is identical at £1,634,500. However, they differ in performance such that the projected future cash flows are different for each machine. Projected cash flows over a 5 year period are shown in Table Qla:. Year Cash Flow: Cash Flow: Cash Flow: Machine B -£1,634,500 950,000 684,500 600,000 575,000 550,000 Table Qla. Machine C -£1,634,500 200,000 280,000 440,000 Machine A -£1,634,500 950,000 700,500 560,500 240,000 130,000 1 3 | 600,000 800,000 4 (i) Show the Payback Period and Total Income for each machine (Machine A, Machine B and Machine C). NOTE: ALL calculations must be shown. (ii) For each machine (Machine A, Machine B and Machine C) calculate Return on Investment (ROI). NOTE: ALL calculations must be shown. (iii) For each machine (Machine A, Machine B and Machine C) calculate the Net Present Value (NPV) after 5 years assuming a discount (inflation) rate of 5% for each year of the project. Table Qla(ii). provides a list of discount factors for a range of discount (inflation) rates. NOTE: ALL calculations must be shown. b) The project manager can purchase one machine only. State which machine the project manager should select and provide justification for their choice of machine based on your analysis of the data.
a) A project requires the purchase of a new piece of machinery. You are the project manager and must choose between three potential machines (Machine A, Machine B and Machine C), either of which would be suitable. The cost of each machine is identical at £1,634,500. However, they differ in performance such that the projected future cash flows are different for each machine. Projected cash flows over a 5 year period are shown in Table Qla:. Year Cash Flow: Cash Flow: Cash Flow: Machine B -£1,634,500 950,000 684,500 600,000 575,000 550,000 Table Qla. Machine C -£1,634,500 200,000 280,000 440,000 Machine A -£1,634,500 950,000 700,500 560,500 240,000 130,000 1 3 | 600,000 800,000 4 (i) Show the Payback Period and Total Income for each machine (Machine A, Machine B and Machine C). NOTE: ALL calculations must be shown. (ii) For each machine (Machine A, Machine B and Machine C) calculate Return on Investment (ROI). NOTE: ALL calculations must be shown. (iii) For each machine (Machine A, Machine B and Machine C) calculate the Net Present Value (NPV) after 5 years assuming a discount (inflation) rate of 5% for each year of the project. Table Qla(ii). provides a list of discount factors for a range of discount (inflation) rates. NOTE: ALL calculations must be shown. b) The project manager can purchase one machine only. State which machine the project manager should select and provide justification for their choice of machine based on your analysis of the data.
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 6EB: The management of Ryland International Is considering Investing in a new facility and the following...
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Transcribed Image Text:a) A project requires the purchase of a new piece of machinery. You are the
project manager and must choose between three potential machines
(Machine A, Machine B and Machine C), either of which would be suitable.
The cost of each machine is identical at £1,634,500. However, they differ
in performance such that the projected future cash flows are different
for each machine. Projected cash flows over a 5 year period are shown in
Table Qlai.
Year Cash Flow:
Cash Flow:
Cash Flow:
Machine A
Machine B
Machine C
-£1,634,500
|950,000
700,500
560,500
-£1,634,500
950,000
-£1,634,500
200,000
1
684,500
600,000
2
280,000
440,000
3
240,000
130,000
600,000
800,000
4
575,000
550,000
Table Qla.
(i) Show the Payback Period and Total Income for each machine
(Machine A, Machine B and Machine C). NOTE: ALL calculations must
be shown.
(ii) For each machine (Machine A, Machine B and Machine C) calculate
Return on Investment (ROI). NOTE: ALL calculations must be shown.
(iii) For each machine (Machine A, Machine B and Machine C) calculate the
Net Present Value (NPV) after 5 years assuming a discount (inflation)
rate of 5% for each year of the project. Table Qla(i). provides a
list of discount factors for a range of discount (inflation) rates.
NOTE: ALL calculations must be shown.
b) The project manager can purchase one machine only. State which machine
the project manager should select and provide justification for their
choice of machine based on your analysis of the data.
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