Bradshaw Bakeries Ltd is evaluating investment alternatives for three machines and has compiled the following relevant information:

Question:

Bradshaw Bakeries Ltd is evaluating investment alternatives for three machines and has compiled the following relevant information:



Investment


Machine M1


Machine M2


Machine M3

Initial investment


$600000




$860 000




$560000


Net cash inflows:

Year   1

               2

               3

               4

               5

               6



$  140000

140000

140000

140000

140000

140000





$  240000

240000

240000

240000

240000





$  180000

180 000

180 000

180 000















The company requires a 10% minimum return on new investments.


Required

A. Calculate the payback period for each investment.

B. Calculate the net present value for each investment.

C. Determine the net present value index for each investment.

D. Based on your analysis in requirements A, B and C above, which machine (if any) should be purchased?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...
Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...
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Accounting

ISBN: 978-1118608227

9th edition

Authors: Lew Edwards, John Medlin, Keryn Chalmers, Andreas Hellmann, Claire Beattie, Jodie Maxfield, John Hoggett

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