The executive management at Xuixa Ltd has decided to introduce a new product line. To achieve this, management has to invest in one of two (2) types of equipment. Option 1 The equipment ‘R’ will cost P200, 000 and is expected to have a life span of five (5) years with no residual value. The company would need to incur a cost of P40, 000 for safe disposal of the equipment at the end of its life span. It is estimated the equipment could yield net returns of P50, 000 in the first three years and net returns of P40, 000 in the last two years. Option 2 The equipment ‘S’ will cost 350,000 and its estimated useful life is four years. There will be no residual value. Acquiring this equipment will involve additional cost of training of P30, 000 for staff that will operate the equipment. It is estimated that the equipment could yield net returns of P80, 000 in the first year, P120, 000 in years 2-3 and P100, 000 in year 4. Required: For both options, calculate: The payback period. The net present value using the following discount factors of 10% Year 1 0.909 2 0.826 751 683 621 Based on your calculations for a. and b., advise management of which option is best.
QUESTION 3
The executive management at Xuixa Ltd has decided to introduce a new product line. To achieve this, management has to invest in one of two (2) types of equipment.
Option 1
The equipment ‘R’ will cost P200, 000 and is expected to have a life span of five (5) years with no residual value. The company would need to incur a cost of P40, 000 for safe disposal of the equipment at the end of its life span.
It is estimated the equipment could yield net returns of P50, 000 in the first three years and net returns of P40, 000 in the last two years.
Option 2
The equipment ‘S’ will cost 350,000 and its estimated useful life is four years. There will be no residual value. Acquiring this equipment will involve additional cost of training of P30, 000 for staff that will operate the equipment.
It is estimated that the equipment could yield net returns of P80, 000 in the first year, P120, 000 in years 2-3 and P100, 000 in year 4.
Required:
For both options, calculate:
- The payback period.
- The
net present value using the following discount factors of 10%
Year 1 0.909 2 0.826
- 751
- 683
- 621
- Based on your calculations for a. and b., advise management of which option is best.
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