Woofington Ltd wants to upgrade its machinery in September and has the choice of Machine A or Machine B.

3a) Explain why it is important for Woofington Ltd to appraise projects/machinery etc. before investing?

Remember to show all workings 4 marks

Machine A will cost 10 million and be disposed of at the end of 4 years for 3 million. Other costs are estimated as follows:

1. Depreciation will be calculated using the straight line method

2. There will be an investment of 2 million in working capital.

3. Sales revenue will be 15 million for years 1 and 2, rising to 17 million in year 3 and 20 million in year 4.

4. The research report cost 800,000 and is to be written off over the four years of this project.

5. Variable costs are estimated to be 20% of sales revenue.

6. Fixed costs associated with this machine are 1.5 million per year.

7. If Woofington invest in this machine they will not have the funds to invest in another project which would gain a contribution of 2.6 million per year in years 1 to 3.

8. Woofington has a cost of capital of 8%

3b) Calculate the yearly Net Relevant Cashflows for Machine A.Show all your workings. 10 marks

3c) Using your answer to 4b) calculate the Net Present Value and Payback Period for Machine A.

Remember to show all workings

3d) Complete the following table and decide which machine you would choose, give reasons for your decision.

Remember to show all workings

Net Present Value Payback Period

MachineA

MachineB 20,000 1year 2months

Decision:

Reasoning:

3e) Discuss two other qualitative (non-financial factors) Woofington Ltd should consider before buying a new machine.