Questions are related to investment appraisal (Decision Management - Degree)

Question | Salazar ple has developed a new product for which a growing demand is anticipated. During the first year, sales are expected to be 20,000 units; the second year, 30,000 units; the third year, $0,000 units; and the fourth year and each year thereafter, 80,000 units. The management must choose between two alternative production amangements: I. Buy a heavy duty machine with a capacity of 90,000 units and an estimated useful life of six years. The machine costs 2500,000. II. Buy a smaller machine with a capacity of 50,090 units and estimated useful life of three years. Three years from today two such machines can be bought to replace the one that will be worn out The smaller machines now cost =200,090 cach. Insurance premiums per year are expected to be $16,090 on the big machine and 4% of the original cost of equipment in use on the small machines. Maintenance cost is expected to be 24,000 per year on the big machine and $2,400 per year on each of the smaller machines. Variable production costs per unit will be 26 with the big machine and 26,20 with the smaller machines. Both machines will have zero disposal values at the end of their respective useful lives. Prices on this type of machinery have been increasing at the rate of 4% compounded annually. The present values of 21 at 10% art: 2 3 14 5 E0.909 20.826 E0. 751 20.683 20.621 20.564 Required: (a) Advise Salazar plc on the choice of production arrangements assuming the minimum desired rate of return is 10%. (b) Ericfly discuss the main problems of this type of evaluation. ( 17 Marks) (5 Marks). [ Total: 22 Marks ]Question 2 AZZ plc supports the concept of terotechnology or life cycle costing for new investment decisions covering its engineering activities. The financial side of this philosophy is now well established and its principles extended to all other areas of decision making. The company is to replace a number of its machines and the production manager is torn. between the Exe machine, a more expensive machine with a life of 12 years, and the Wye machine with an estimated life of six years. If the Wye machine is chosen it is likely that it would be replaced at the end of six years by another Wye, machine. The pattern of maintenance and running costs differs between the two types of machine and relevant data are shown below. Exe Wye E E Purchase price 19,000 13,000 Trade-in value 3,000 3,000 Annual repair costs 2,000 . 2,600 Overhaul costs (at year 8) 4,000 (at year 4) 2,000 Estimated Snancing costs averaged over machine Life 10%Da 10%pa Required (a) Recommend, with supporting figures, which machine to purchase, stating any 12 Marks assumptions.made. (b). Describe an appropriate method of comparing replacement proposals with unequal 5 Marks lives