Outhwaite Benson Limited manufactures a wide range of gardening equipment. It has recently a new design of compost bin. A market research project was undertaken in which the prototype was demonstrated to a large number of gardeners at show gardens around the country. Results of market research have been very promising. In addition, the company$$s marketing directors has used her contacts to have the new design prominently featured in a prime$-$time television gardening programme. The programme is due to appear in three months$$ time, and the company expects to receive a large number of orders very soon afterwards. The directors have decided that they must gear up production to be ready for anticipated demand for the new product. The production director has investigated the available machines and has decided that the choice comes down to two alternatives, Machine A and Machine B$.$ Machine A requires $28,000$ investment cost with no residual value at the end of four years while Machine B requires $24,000$ investment cost with $1,200$ residual value at the end of four years.

The projections for the two proposals are shown below:

Year Increase in annual operating profit Increase in annual net cash inflows

Machine A Machine B Machine A Machine B

$12,5003,00015,00011,000$

$22,0003,00010,00011,000$

$32,0003,0009,50011,000$

$42,5003,0005,00011,000$

Total $9,00012,00039,50044,000$

Outhwaite Benson Limited requires a minimum return $($Cost of Capital$)$ of $10\%$ per annum.

Required:

As the company$$s management accountant, you are required to write a report to company$$s directors and advise them which machine Outhwaite Benson Limited ought to choose. When writing your report, you need to include full computation of payback period, accounting rate of return, and net present value. You also need to bear in your mind that the sales director estimates that demand will be greatest in the first two years and Machine B might not be able to produce sufficient items to meet demands in the first two years. However, the directors decide they would, nevertheless, like to consider the purchase of Machine B because it requires less capital outlay and has residual value at the end of useful life.

the marks awarded. $2$ marks are awarded to table comparing the results of PP$,$ ARR, NPV for both machines, $4$ marks are awarded to your critical discussion about results in your table, and $1$ mark will be awarded to correct report format. When writing your report, you have to assume that some directors have no knowledge of accounting and finance. So$,$ provide as much detail as you can $($including definition, etc.$).$

PRESENT VALUE TABLE

Present Value Factors for $1\mathrm{.}000$

Period Discount rate

$1\%2\%3\%4\%5\%6\%8\%10\%12\%$

$10\mathrm{.}9900\mathrm{.}9800\mathrm{.}9710\mathrm{.}9620\mathrm{.}9520\mathrm{.}9430\mathrm{.}9260\mathrm{.}9090\mathrm{.}893$

$20\mathrm{.}9800\mathrm{.}9610\mathrm{.}9430\mathrm{.}9250\mathrm{.}9070\mathrm{.}8900\mathrm{.}8570\mathrm{.}8260\mathrm{.}797$

$30\mathrm{.}9710\mathrm{.}9420\mathrm{.}9150\mathrm{.}8890\mathrm{.}8640\mathrm{.}8400\mathrm{.}7940\mathrm{.}7510\mathrm{.}712$

$40\mathrm{.}9610\mathrm{.}9240\mathrm{.}8880\mathrm{.}8550\mathrm{.}8230\mathrm{.}7920\mathrm{.}7350\mathrm{.}6830\mathrm{.}636$

$50\mathrm{.}9510\mathrm{.}9060\mathrm{.}8630\mathrm{.}8220\mathrm{.}7840\mathrm{.}7470\mathrm{.}6810\mathrm{.}6210\mathrm{.}567$

$60\mathrm{.}9420\mathrm{.}8880\mathrm{.}8370\mathrm{.}7900\mathrm{.}7460\mathrm{.}7050\mathrm{.}6300\mathrm{.}5640\mathrm{.}507$

$70\mathrm{.}9330\mathrm{.}8710\mathrm{.}8130\mathrm{.}7600\mathrm{.}7110\mathrm{.}6650\mathrm{.}5830\mathrm{.}5130\mathrm{.}452$

$80\mathrm{.}9230\mathrm{.}8530\mathrm{.}7890\mathrm{.}7310\mathrm{.}6770\mathrm{.}6270\mathrm{.}5400\mathrm{.}4670\mathrm{.}404$

$90\mathrm{.}9140\mathrm{.}8370\mathrm{.}7660\mathrm{.}7030\mathrm{.}6450\mathrm{.}5920\mathrm{.}5000\mathrm{.}4240\mathrm{.}361$

$100\mathrm{.}9050\mathrm{.}8200\mathrm{.}7440\mathrm{.}6760\mathrm{.}6140\mathrm{.}5580\mathrm{.}4630\mathrm{.}3860\mathrm{.}322$

PRESENT VALUE OF AN ANNUITY TABLE

Present Value Factors for an Annuity for $1\mathrm{.}000$ per Period.

Period Discount rate

$1\%2\%3\%4\%5\%6\%8\%10\%12\%$

$10\mathrm{.}9900\mathrm{.}9800\mathrm{.}9710\mathrm{.}9620\mathrm{.}9520\mathrm{.}9430\mathrm{.}9260\mathrm{.}9090\mathrm{.}893$

$21\mathrm{.}9701\mathrm{.}9421\mathrm{.}9131\mathrm{.}8861\mathrm{.}8591\mathrm{.}8331\mathrm{.}7831\mathrm{.}7361\mathrm{.}690$

$32\mathrm{.}9412\mathrm{.}8842\mathrm{.}8292\mathrm{.}7752\mathrm{.}7232\mathrm{.}6732\mathrm{.}5772\mathrm{.}4872\mathrm{.}402$

$43\mathrm{.}9023\mathrm{.}8083\mathrm{.}7173\mathrm{.}6303\mathrm{.}5463\mathrm{.}4653\mathrm{.}3123\mathrm{.}1703\mathrm{.}037$

$54\mathrm{.}8534\mathrm{.}7134\mathrm{.}5804\mathrm{.}4524\mathrm{.}3294\mathrm{.}2123\mathrm{.}9933\mathrm{.}7913\mathrm{.}605$

$65\mathrm{.}7955\mathrm{.}6015\mathrm{.}4175\mathrm{.}2425\mathrm{.}0764\mathrm{.}9174\mathrm{.}6234\mathrm{.}3554\mathrm{.}111$

$76\mathrm{.}7286\mathrm{.}4726\mathrm{.}2306\mathrm{.}0025\mathrm{.}7865\mathrm{.}5825\mathrm{.}2064\mathrm{.}8684\mathrm{.}564$

$87\mathrm{.}6527\mathrm{.}3257\mathrm{.}0206\mathrm{.}7336\mathrm{.}4636\mathrm{.}2105\mathrm{.}7475\mathrm{.}3354\mathrm{.}968$

$98\mathrm{.}5668\mathrm{.}1627\mathrm{.}7867\mathrm{.}4357\mathrm{.}1086\mathrm{.}8026\mathrm{.}2475\mathrm{.}7595\mathrm{.}328$

$109\mathrm{.}4718\mathrm{.}9838\mathrm{.}5308\mathrm{.}1117\mathrm{.}7227\mathrm{.}3606\mathrm{.}7106\mathrm{.}1455\mathrm{.}650$