QuestionisABC Limited a food manufacturer is considering purchasing a new machine for 275,000. The company is expecting
Question:
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QuestionisABC Limited a food manufacturer is considering purchasing a new machine for 275,000. The company is expecting an annual cash inflow of 85,000 from the sale of products and an annual cash outflow of 12,500 for each of the six years of the machine's useful life. The annual cash outflows do not include annual depreciation charges for the machine. The machine is depreciated using the straight -line method. The machine is expected to last for six years, with a residual value estimated to be at the rate of 15% of the original cost of the machine. The cost of capital for Lovewell Limited is 12%.
You are required to:
1. Calculate using the following investment appraisal techniques, and provide brief recommendations as to the economic feasibility of acquiring the machine: a. The Payback Period. b. The Accounting Rate of Return. c. The Net Present Value. d. The Internal Rate of Return (to two decimal places)(20 marks)
2. Critically evaluate the benefits and limitations of each of the differing investment appraisal techniques.
(30 marks)
Table 1 Applied Penalties for Exceeding the word count.
Word limit Penalty ActualWord Count Exceeds limit by up to 10% No penalty - tolerance band (see below)3300 Exceeds limit by 10.1-20% -5%3301 - 3600 Exceeds limit by 20.1-30% -10 % 3601 - 3900 Exceeds limit by 30.1-40% -15 % 3901 - 4200 Exceeds limit by 40.1-50% -20 % 4201 - 4500 Exceeds limit by more than 50% Mark of zero4501+
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