Answered step by step
Verified Expert Solution
Question
1 Approved Answer
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)
Step by Step Solution
★★★★★
3.46 Rating (143 Votes )
There are 3 Steps involved in it
Step: 1
Particualrs A B C D Revenue 190000000 319200000 208000000 220000000 Operational Cost 96000000 147600000 116000000 104000000 Operating Income 94000000 ...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started