Cost accounting question on investment appraisal

break down regularly and needs to be replaced. A replacement machine is expected to cost $55000. It is expected to last 5 years and will be depreciated using the straight-line method of depreciation. At the end of the period the machine will be scrapped with no residual value. The following information is available for the replacement machine: The selling price for each unit produced by the machine is expected to be $40 for years 1 and 2 . This is expected to increase by 25% for year 3. There is no expected change for year 4. However, the selling price is expected to increase by a further 10% for year 5 . 2 The cost of production for each unit produced is expected to be $20 for years 1 and 2 . This will increase by 25% for year 3 and then remain unchanged. 3 The present value for the net cash flows for the years 1 to 5 have been calculated as follows: REQUIRED (a) Distinguish between the payback method of investment appraisal and the net present value [4] mathod. (b) Calculate the expected net present value for the replacement machine. [1] (c) (i) Calculate the annual net cash flows for years 1 to 5 for the replacement machine. [5] (ii) Calculate the payback period for the replacement machine. [2] 3 The present value for the net cash flows for the years 1 to 5 have been calculated as follows: REQUIRED (a) Distinguish between the payback method of investment appraisal and the net present value [4] method. (b) Calculate the expected net present value for the replacement machine. [1] (c) (i) Calculate the annual net cash flows for years 1 to 5 for the replacement machine. [5] (ii) Calculate the payback period for the replacement machine. [2] (iii) Calculate the number of units for each year that Wong Ho expects to produce with the replacement machine. [8] (d) Recommend whether or not Wong Ho should purchase the replacement machine. Justify your answer. [5]