Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

QUESTION 4 (25 Marks) REQUIRED 4.1 Calculate the Payback Period of Machine A (expressed in years, months and days). (3 marks) 4.2 Calculate the Net

QUESTION 4 (25 Marks)

REQUIRED

4.1 Calculate the Payback Period of Machine A (expressed in years, months and days). (3 marks)

4.2 Calculate the Net Present Value of both machines. (8 marks)

4.3 Calculate the Accounting Rate of Return on initial investment (expressed to two decimal places) of both machines. (8 marks)

4.4 Calculate the Internal Rate of Return of Machine B (expressed to two decimal places). (5 marks)

4.5 If the time value of money is taken into account, which machine should be chosen? Why? (1 mark)

INFORMATION The directors of Lomax Ltd intend expanding the company and they have the choice of purchasing one of two machines at the end of 2022 viz. Machine A or Machine B. Both machines have a five-year life, with only Machine A having a residual value of R300 000. The annual volume of production of each machine is estimated at 6 000 pallets (comprising 500 bricks each), which can be sold at R520 per pallet. Depreciation is calculated on the machines using the straight-line method.

Machine A costs R4 800 000 excluding installation cost of R300 000. The annual variable costs are estimated at R1 100 000. A major overhaul at a cost of R200 000 is expected to be undertaken at the end of year three. Fixed costs are estimated at R500 000 (excluding depreciation).

Machine B costs R5 100 000 including installation costs of R400 000. Its annual variable costs are estimated at R1 050 000. Fixed costs are the same as for Machine A.

The cost of capital may be assumed to be 14%.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Environmental Health And Safety Audits A Compendium Of Thoughts And Trends

Authors: Lawrence B. Cahill

2nd Edition

1598889737, 978-1598889734

More Books

Students also viewed these Accounting questions

Question

Consider some type of redress for the customer, such as a coupon.

Answered: 1 week ago

Question

Sell the quality of your brand or products.

Answered: 1 week ago