A manufacturer is contemplating the purchase of either of two machines at a cost of Kshs 155 million and Kshs 180 million respectively. The machines will generate cashflows receivable at the end of each respective year as follows. Machine B cashflows (millions) cashflows (millions) Year Machine A 1 55 90 35 85 3 (35) 55 4 68 46 72 37 41 Machine A has an estimated salvage value of Kshs 10 million at the end of year six. Machine B would cost jambo an estimated Kshs 10 million to dispose off at the end of year five. Jambo has a cost of capital of 15 percent per annum. i) Using NPV approach, advice jambo as to which of the machines it should invest in.
A manufacturer is contemplating the purchase of either of two machines at a cost of Kshs 155 million and Kshs 180 million respectively. The machines will generate cashflows receivable at the end of each respective year as follows. Machine B cashflows (millions) cashflows (millions) Year Machine A 1 55 90 35 85 3 (35) 55 4 68 46 72 37 41 Machine A has an estimated salvage value of Kshs 10 million at the end of year six. Machine B would cost jambo an estimated Kshs 10 million to dispose off at the end of year five. Jambo has a cost of capital of 15 percent per annum. i) Using NPV approach, advice jambo as to which of the machines it should invest in.
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:A manufacturer is contemplating the purchase of either
of two machines at a cost of Kshs 155 million and Kshs 180
million respectively. The machines will generate cashflows
receivable at the end of each respective year as follows.
Machine B
cashflows (millions) cashflows (millions)
a)
Year
Machine A
1
55
90
2
35
85
3
(35)
55
4
68
46
72
37
41
Machine A has an estimated salvage value of Kshs 10 million at
the end of year six. Machine B would cost jambo an estimated
Kshs 10 million to dispose off at the end of year five. Jambo has
a cost of capital of 15 percent per annum.
i) Using NPV approach, advice jambo as to which of the
machines it should invest in.
ii) Due to the likelihood of technological changes, jambo would
prefer to invest in
exceeding four years. Using the discounted payback approach,
which machine if any should jambo invest in.
machines with a payback period not
iii) When is the modified IRR appropriate to be used in capital
budgeting decisions
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