Omega Limited intends purchasing a new machine and has a choice between the following two machine: Machine ABC: The cost of this machine is R200 000 with an expected economic life of 5 years and a residual value of R20 000. Depreciation is calculated on the straight-line method. The expected new cash flows are as follows: Year 1 R68 000 Year 2 R54 000 Year 3 R64 000 Year 4 R60 000 Year 5 R52 000 Machine XYZ: The cost of machine XYZ is R220 000. It has an expected economic life of 5 years with no residual value. Depreciation is calculated on the straight-line method. The expected new cash flows are R66 000 per annum every year for the 5-year period. Omega Limited estimates that its cost of capital is 14%. Required: 2.1 Calculate the payback period for machine XYZ (answers must be expressed years, months and days) 2.2 Calculate the accounting rate of return for Machine ABC 2.3 Explain two advantages of using the accounting rate of return in capital investment appraisal.

Omega Limited intends purchasing a new machine and has a choice between the following two machine: Machine ABC: The cost of this machine is R200 000 with an expected economic life of 5 years and a residual value of R20 000. Depreciation is calculated on the straight-line method. The expected new cash flows are as follows: Year 1 R68 000 Year 2 R54 000 Year 3 R64 000 Year 4 R60 000 Year 5 R52 000 Machine XYZ: The cost of machine XYZ is R220 000. It has an expected economic life of 5 years with no residual value. Depreciation is calculated on the straight-line method. The expected new cash flows are R66 000 per annum every year for the 5-year period. Omega Limited estimates that its cost of capital is 14%. Required: 2.1 Calculate the payback period for machine XYZ (answers must be expressed years, months and days) 2.2 Calculate the accounting rate of return for Machine ABC 2.3 Explain two advantages of using the accounting rate of return in capital investment appraisal.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 12P

See similar textbooks

Machine ABC:

The cost of this machine is R200 000 with an expected economic life of 5 years and a residual value of R20 000. Depreciation is calculated on the straight-line method. The expected new cash flows are as follows:

Year 1	R68 000
Year 2	R54 000
Year 3	R64 000
Year 4	R60 000
Year 5	R52 000

Machine XYZ:

The cost of machine XYZ is R220 000. It has an expected economic life of 5 years with no residual value. Depreciation is calculated on the straight-line method. The expected new cash flows are R66 000 per annum every year for the 5-year period.

Omega Limited estimates that its cost of capital is 14%. Required:

2.1 Calculate the payback period for machine XYZ (answers must be expressed years, months and days)

2.2 Calculate the accounting rate of return for Machine ABC

2.3 Explain two advantages of using the accounting rate of return in capital investment appraisal.

2.4 Calculate the net present value of each machine (round off to nearest rand).

Definition Definition Calculation used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. NPV is calculated as the difference between the present value of cash inflow and cash outflow. NPV is used for capital budgeting and investment planning as well as to compare similar investment alternatives.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: Introduction

VIEW

Step 2: Calculation of payback period and ARR

VIEW

Step 3: Explanation of advantages

VIEW

Solution

VIEW

Step by step

Solved in 4 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Similar questions

Heidi Company is considering the acquisition of a machine that costs $596,000. The machine is expected to have a useful life of 6 years, a negligible residual value, an annual net cash inflow of $121,000, and annual operating income of $86,546. The estimated cash payback period for the machine is (round to one decimal point)? a.4.9 years b.6.9 years c.6.0 years d.7.5 years
Hayden Company is considering the acquisition of a machine that costs $320,000. The machine is expected to have a useful life of 6 years, a negligible residual value, an annual net cash flow of $86,000, and annual operating income of $73,100. What is the estimated cash payback period for the machine (round to one decimal points)? Oa. 1.2 years Ob. 5.6 years Oc. 3.7 years Od. 4.4 years
Heidi Company is considering the acquisition of a machine that costs $543,000. The machine is expected to have a useful life of 6 years, a negligible residual value, an annual net cash inflow of $142,000, and annual operating income of $84,441. The estimated cash payback period for the machine is (round to one decimal point)? Oa. 5.0 years Ob. 6.4 years Oc. 3.8 years Od. 6.5 years
Wozo Ltd is to spend $60,000 on a machine which will have an economic life of ten years and no residual value. Depreciation is to be charged using the straight line method. Estimated operating cash flows are:Year 1: - 2 000Year 2: +13 000Year 3: +20 000Year 4-6: +25 000 per annumYear 7-20 +30 000 per annumRequired:Calculate the payback period and the Accounting Rate of Return (ARR); (using the initial investment base not the average investment base) (show all you calculations)
Heidi Company is considering the acquisition of a machine that costs $828,800. The machine is expected to have a useful life of six years, a negligible residual value, an annual net cash flow of $112,000, and annual operating income of $80,000. What is the estimated cash payback period for the machine (round to one decimal point)? a.10.4 years b.4.3 years c.7.4 years d.1.4 years Determine the average rate of return for a project that is estimated to yield total income of $411,040 over four years, cost $668,000, and has a $66,000 residual value. %
XYZ Company is looking to invest in some new machinery to replace its current malfunctioning one. The new machine, which costs P420,000, would increase annual revenue by P200,000 and annual cash expenses by P50,000. The machine is estimated to have a useful life of 12 years and P30,000 salvage value. Solve for the: A. Payback period in years B. Payback period reciprocal C. Accounting rate of return on initial investment D. Accounting rate of return on average investment.
Bunnings Ltd is considering to invest in one of the two following projects to buy a newequipment. Each equipment will last 5 years and have no salvage value at the end. Thecompany’s required rate of return for all investment projects is 8%. The cash flows of theprojects are provided below.Equipment 1 Equipment 2Cost $186,000 $195,000Future Cash FlowsYear 1Year 2Year 3Year 4Year 586 00093 00083 00075 00055 00097 00084 00086 00075 00063 000Required:a) Identify which option of equipment should the company accept based onProfitability Index? b) Identify which option of equipment should the company accept based ondiscounted pay back method if the payback criterion is maximum 2 years? Do not use excel calculations
Hayden Company is considering the acquisition of a machine that costs $389,000. The machine is expected to have a useful life of six years, a negligible residual value, an annual net cash flow of $86,000, and annual operating income of $73,100. What is the estimated cash payback period for the machine (round to one decimal points)? a.1.2 years b.5.3 years c.4.5 years d.6.5 years The expected average rate of return for a proposed investment of $4,540,000 in a fixed asset, using straight-line depreciation, with a useful life of 20 years, no residual value, and an expected total net income of $9,080,000 over the 20 years is (round to two decimal points). a.10.00% b.1.00% c.20.00% d.40.00%
Hayden Company is considering the acquisition of a machine that costs $429,000. The machine is expected to have income of $71,400. The estimated cash payback period for the machine is (round to one decimal place) O a. 7.2 years Ob. 6.0 years O c. 1.2 years O d. 5.1 years useful life of 6 years, a negligible residual value, an annual net cash inflow of $84,000, and annual operating
Hayden Company is considering the acquisition of a machine that costs $392,000. The machine is expected to have a useful life of six years, a negligible residual value, an annual net cash flow of $89,000, and annual operating income of $75,650. What is the estimated cash payback period for the machine (round to one decimal points)? a.5.2 years b.6.4 years c.4.4 years d.1.2 years can also explain how? thank you !
Hayden Company is considering the acquisition of a machine that costs $571,000. The machine is expected to have a useful life of 6 years, a negligible residual value, an annual net cash inflow of $91,000, and annual operating income of $77,350. The estimated cash payback period for the machine is (round to one decimal place) O a. 8.6 years O b. 6.3 years O c. 1.2 years O d. 7.4 years
Bunnings Ltd is considering to invest in one of the two following projects to buy a new equipment. Each equipment will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 8%. The cash flows of the projects are provided below.Equipment 1 Equipment 2Cost $186,000 $195,000Future Cash FlowsYear 1Year 2Year 3Year 4Year 586 00093 00083 00075 00055 00097 00084 00086 00075 00063 000Identify which option of equipment should the company accept based ondiscounted pay back method if the payback criterion is maximum 2 years?