Lesego Ltd is considering an investment in a new machine for the production of a new product, X. There are two possibilities, Machine A and Machine B. Both product X and the machine would have an expected life of five years.

The following information is available:

Product X Selling price $50

Variable cost 32

Increase in fixed overhead (excluding depreciation of the new machine) is $90,000 per year. Year

Sales units 110,000

215,000

320,000

420,000

55,000

Machine AMachine B

Initial cost ($000)550480

Residual value5030

The company's cost of capital is 10%,

Required:

a. Evaluate each machine, using the following methods:

i.Accounting rate of return

ii.Payback;

iii.Net present value.

b. Discuss the importance of capital budgeting in organisations.