A year ago, Robin plc invested in a machine to improve the manufacturing of one of its products. It has just discovered that a new machine has come onto the market which would improve performance more than the one it bought. The first machine cost €8,000 a year ago, and is depreciated on a straight-line basis over eight years (the same period as its useful life, after which it will be scrapped). If it were sold now, the company would get around €5,000 (tax credit on the capital loss would be 25%).

The new machine costs €11,000 and would be depreciated for €10,500 on a straight-line basis over its useful life, estimated at seven years. It could be sold at the end of its useful life for €500, which is what its book value would be.

The company is hoping to produce 100,000 units of its product annually for the next seven years. With the equipment currently in use, the company's per unit cost price breaks down as follows: €0.14 per unit in direct labour costs, €0.10 for raw materials and €0.14 in general costs.

The new machine will enable the company to cut direct labour costs to

€0.12 per unit produced. The cost of raw materials will drop to €0.09 per unit thanks to a reduction in waste. General costs will remain at

€0.14 per unit. All other factors will remain unchanged, in particular supplies, energy consumed and maintenance costs. Profits are taxed at 40%.

Draw up the cash flow schedule for the contemplated investment.

Calculate the discounted payback ratio on this investment.

AppendixLO1