Both machines have an initial cost of N$700,000. The residual value of Machine A is expected to be N$60,000 and that Machine B, N$20,000. The chairman of the company has stated that, for the foreseeable future, the liquidity situation of

the company needs to be carefully monitored.

Assume the company's cost of capital is 10% per annum, the discounts factors for which are:

Year 1 0.909

Year 2 0.826

Year 3 0.751

Year 4 0.683

Year 5 0.621

You are required to:

a. Calculate the Accounting Rate of Return for each machine, using the average capital

invested.

b. Calculate the Net Present Value of each machine.

c. Calculate the discounted payback period of each machine.

d. On the basis of the answers to (a), (b) and (c), advise with reasons as to which machine should be purchased.

e. Calculate the Internal Rate of Return of each project.

QUESTION 2 [25 MARKS) Operation Hornkranz Lid is considering investing in a machine in order to increase its profitability. Two machines, A and B are under consideration The estimated annual profit increases after the calculation of straight-line depreciation over the Wife of the machines are as follows: Machine A N$000 205 Machine B N$000 130 Year 1 Year 2 Year 3 205 130 200 180 170 230 Year 4 Year 5 80 220 Both machines have an initial cost of N$ 700,000. The residual value of Machine A is expected to be N$60,000 and that Machine B. N$20,000 The chairman of the company has stated that, for the foreseeable future, the liquidity situation of the company needs to be carefully monitored. Assume the company's cost of capital is 10% per annum, the discounts factors for which are: Year 1 0.909 0.826 Year 3 0.751 Year 4 0,683 Year 5 0.621 Year 2 You are required to a Calculate the Accounting Rate of Retum for each machine, using the average capital invested b. Calculate the Net Present Value of each machine c. Calculate the discounted payback period of each machine. (4) d. On the basis of the answers to (a), (b) and (c), advise with reasons as to which machine should be purchased (2) 3 e. Calculate the Internal Rate of Return of each project. (8) QUESTION 2 [25 MARKS) Operation Hornkranz Lid is considering investing in a machine in order to increase its profitability. Two machines, A and B are under consideration The estimated annual profit increases after the calculation of straight-line depreciation over the Wife of the machines are as follows: Machine A N$000 205 Machine B N$000 130 Year 1 Year 2 Year 3 205 130 200 180 170 230 Year 4 Year 5 80 220 Both machines have an initial cost of N$ 700,000. The residual value of Machine A is expected to be N$60,000 and that Machine B. N$20,000 The chairman of the company has stated that, for the foreseeable future, the liquidity situation of the company needs to be carefully monitored. Assume the company's cost of capital is 10% per annum, the discounts factors for which are: Year 1 0.909 0.826 Year 3 0.751 Year 4 0,683 Year 5 0.621 Year 2 You are required to a Calculate the Accounting Rate of Retum for each machine, using the average capital invested b. Calculate the Net Present Value of each machine c. Calculate the discounted payback period of each machine. (4) d. On the basis of the answers to (a), (b) and (c), advise with reasons as to which machine should be purchased (2) 3 e. Calculate the Internal Rate of Return of each project. (8)