Page 2 of 5 Question 2 Busket Ltd is considering an investment in a new machine for the production of a new product A. There are two possibilities, Machine X and Machine Y. Both the product and the machine would have an expected life of five years. The following information is available: Product A Selling price N$100 Variable cost N$64 Increase in fixed overhead (excluding depreciation of the new machine) is N$180,000 per year. Sales units Year 1 20,000 30,000 2 3 40,000 4 40,000 5 10,000 Machine X Machine Y Initial cost N$1,100,000 N$960,000 Residual value N$100 N$60 The company's cost of capital is 10%, the appropriate discount factors are: Year 1 0.909 Year 2 0.826 Year 3 0.751 Year 4 0.682 Year 5 0.621 Required: (a) Evaluate each machine, X and Y, using the following methods: (1) Accounting rate of return (using average investment) Page 3 of 5 (ii) Payback (ii) Net present value (16 marks) (b) On the basis of your figures in (a) above, advise management as to which machine to purchase, stating reasons for your decision. (3 marks) (c) State the comparative strengths and weaknesses of both the Accounting Rate of Return and Net Present Value as methods of evaluation. (6 marks) (Total 25 marks)