Lesego Ltd is considering an investment in a new machine for the production of a new product, X. There are two possibilities, Machine A and Machine B. Both product X and the machine would have an expected life of five years. The following information is available: Product X Selling price $50 Variable cost 32 Increase in fixed overhead (excluding depreciation of the new machine) is $90,000 per year. Year Sales units 1 10,000 2 15,000 3 20,000 4 20,000 5 5,000 Machine A Machine B Initial cost ($000) 550 480 Residual value 50 30 The company's cost of capital is 10%, Required: a. Evaluate each machine, using the following methods: i. Accounting rate of return ii. Payback; iii. Net present value. b. Discuss the importance of capital budgeting in organisations.
Lesego Ltd is considering an investment in a new machine for the production of a new product, X. There are two possibilities, Machine A and Machine B. Both product X and the machine would have an expected life of five years.
The following information is available:
Product X Selling price $50
Variable cost 32
Increase in fixed overhead (excluding
Sales units 1 10,000
2 15,000
3 20,000
4 20,000
5 5,000
Machine A Machine B
Initial cost ($000) 550 480
Residual value 50 30
The company's cost of capital is 10%,
Required:
a. Evaluate each machine, using the following methods:
i. Accounting
ii. Payback;
iii.
b. Discuss the importance of capital budgeting in organisations.
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