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Part B- Toyland Itd, is well established London based company which manufactures toys for children. The directors are expecting that demand of toys in future
Part B- Toyland Itd, is well established London based company which manufactures toys for children. The directors are expecting that demand of toys in future will increase significantly and with current capacity company will not be able to meet the demand. Therefore, directors have decided to purchase a new machine to enhance the capacity to benefit from the expected increase in demand. Two versions of machines are available from different manufacturers at the same cost of $500,000. Both machines have six years useful life and will be sold at estimated price of 150,000 at the end of sixth year. Toyland will use straight line method for depreciation of these machines. Cost of capital for both machines is 10%. Directors are to purchase one machine from the available two, same cost and net cash inflow from both machines is confusing them to take decision. You are Finance Manager of Toyland Itd and directors have asked to produce a report which should make things clear for them to take decision. Further information regarding net cash inflow from both machines is provided below: Machine A Machine B Years Cash flow Cash flow 0 (500,000) (500,000) 300,000 20,000 250,000 50,000 200,000 150,000 QUAUNN 150,000 200,000 50,000 250,000 20.000 300,000 Requirements: Required: 1. Calculate using the following investment appraisal techniques, and provide recommendations as to the economic feasibility of acquiring the suitable machine: a. The Payback Period. b. The Discounted Payback Period. c. The Accounting Rate of Return. d. The Net Present Value. e. The Internal Rate of Return (to two decimal places)
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