Note: Where applicable, refer to the present value tables (APPENDIX 1 and 2. REQ

Question

Note: Where applicable, refer to the present value tables (APPENDIX 1 and 2. REQUIRED Study the information given below and answer the following questions Calculate the Payback Period for both machines. (Answers must be expressed in years, months and days.) .1 1.2 Calculate the Net Present Value of Machine B. (Round off amounts to the nearest Rand ) 1.3 Calculate the Accounting Rate of Return of MachineA. INFORMATION Montana Limited wants you to evaluate two machines, one of which will be chosen for a project following information is available: Machine A 4 years Machine B Estimated ife span Cost of capital 250 000 250 000 Scrap value at end of economic ie Annual net cash inflow End of: Year 1 80 000 80000 80000 80 000 80 000 120 000 80 00060 000 50 000 50 000 50000 Year 2 Year 3 100 000 preciation

Explanation / Answer

1. Calculation of payback period of Machine A -

payback period = 3 + (10000/80000) *12

= 3 year and 1.5 months

for machine B

payback period = 3 + (20000/120000)*12

= 3 years and 2 months

2. Calculation of NPV of machine B -

NPV of Machine B is 18162.

3. Accounting rate of return = Average accountign prodit / Average investment

average accounting profit = 80000 - Dep.(250000/5)

= 30000

Initial investment = 250000

Accounting rate of return = 30000/250000

= 12%

Please note all values are in $.

In case of any clarification required please comment.

Year Cash flow of Machine A Cum. Cash flow 0 -250000 -250000 1 80000 -170000 2 80000 -90000 3 80000 -10000 4 80000 70000 5 80000 150000

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