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STSC Plastics Limited is planning to purchase a new material handling machine for its manufacturing unit. The company is considering the following four mutually

 

STSC Plastics Limited is planning to purchase a new material handling machine for its manufacturing unit. The company is considering the following four mutually exclusive investments. The required payback period is five years. The company tax rate is 28%. The financial data for the four machines are given below. Machine Revenue Operational costs Depreciation on machinery Interest on borrowings Machine Cost Machine A Machine B $ $ 1,900,000 3,192,000 960,000 1,476,000 360,000 400,000 140,000 210,000 3,600,000 5,200,000 10 13 Machine C Machine D $ 2,080,000 1,160,000 378,182 165,000 4,160,000 11 $ 2,200,000 1,040,000 464,000 182,000 4,640,000 (c) Discuss why the above two investment appraisal methods do not give consistent the accept/reject decision. Which method should the CFO employ? Why? 10 Machine life (years) The manufacturing department has requested the chief financial officer (CFO) to evaluate the above investment opportunities using both payback period and internal rate of return (IRR) methods. Required: (a) Calculate each machine's payback period and state which alternative should be accepted based on this criterion. (6 marks) (b) Calculate each machine's internal rate of return (IRR), and using a hurdle rate of 17%, state which of the alternatives is acceptable by this criterion. (8 marks) answers for (6 marks)

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