ABTS Co Ltd is considering the purchase of a new machine. Two alternative machines (A and B) have been suggested each having an initial cost of R400 000 and requiring R20 000 as additional working capital at the end of the 1st year Earnings after taxation are expected to be as follows. All cash flows are expected at the end of each period. Year1 Year 2 Year 3 Year 4 Year 5 Machine A R40 000 R120 000 R160 000 R240 000 R160 000 Machine B R120 000 R160 000 R200 000 R120 000 R80 000 The company has target return on capital of 10% and on this basis, you are required to compare the profitability of the machines and state which alternatives you consider financially preferable using the i) Payback, ii) Net Present Value and iii) Internal Rate of Return methods

ABTS Co Ltd is considering the purchase of a new machine. Two alternative machines (A and B) have been suggested each having an initial cost of R400 000 and requiring R20 000 as additional working capital at the end of the 1st year Earnings after taxation are expected to be as follows. All cash flows are expected at the end of each period. Year1 Year 2 Year 3 Year 4 Year 5 Machine A R40 000 R120 000 R160 000 R240 000 R160 000 Machine B R120 000 R160 000 R200 000 R120 000 R80 000 The company has target return on capital of 10% and on this basis, you are required to compare the profitability of the machines and state which alternatives you consider financially preferable using the i) Payback, ii) Net Present Value and iii) Internal Rate of Return methods

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk

Section: Chapter Questions

Problem 2P

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ABTS Co Ltd is considering the purchase of a new machine. Two alternative machines (A and B) have been suggested each having an initial cost of R400 000 and requiring R20 000 as additional working capital at the end of the 1st year Earnings after taxation are expected to be as follows. All cash flows are expected at the end of each period.Year1 Machine A R40 000Machine B R120 000Year 2 R120 000 R160 000Year 3 R160 000 R200 000Year 4 R240 000 R120 000Year 5 R160 000 R80 000The company has target return on capital of 10% and on this basis, you are required to compare the profitability of the machines and state which alternatives you consider financially preferable using the i) Payback, ii) Net Present Value and iii) Internal Rate of Return methods.
3. Kiwanda limited is considering the purchase of a new machine. Two alternatives machines, A and B, which will cost shs 6m and 7m respectively, are available in the market at a cost of 12%. The cash flows after taxation of each machine are as follows;Year Cash flowMachine A Machine Bshs shs1. 600,000 1,800,0002. 1,800,000 2,400,0003. 2,000,000 3,000,0004. 3,000,000 1,800,0005. 2,400,000 1,600,000 Required:a. Compute the net present value of each machine. b. Assume that each machine represent a project. Compute the Internal rate of return the company expects to earn from each of the two projects. c. Comments on the use of the results obtained in (a) and (b) above in selecting between the two projects.
Tiberius Manufacturing is considering two alternative investment proposals with the following data: Proposal X Investment $10,800,000 Useful life. Estimated annual net cash inflows for 5 years 5 years $2,160,000 Residual value $60,000 Depreciation method Straight-line Required rate of return 14% Calculate the accounting rate of return for Proposal Y. (Round any intermediate calculations and your final answer to two decimal places.) OA. 13.90% OB. 11.56% OC. 17.83% OD. 7.58% Proposal Y $440,000 5 years $99,000 $35,000 Straight-line 13%
Raisons Reels Pty Ltd is considering investing in the purchase of new equipment The equipment will cost $350 000 There will be net cash inflows in each of the three years of: Year 1: $140 000, Year 2: $160 000 and Year 3: $122 000 The equipment is thought to have a residual value of $60 000 at the end of year 3 The required rate of return (RRR) is 14% 4.The Accounting Rate of Return (ARR) for this investment is: 5. Which of the following statements is true regarding the decision rule for ARR? 6. A qualitative feature of investments is:
2. A company determines that the maximum they should pay for a new machine is $46,679. The company estimates the machine will produce a net cash flow of $8,000 per year and will last for 7 years. The interest rate that is acceptable to the company is 5%. At the end of 7 years the company estimates it will be able to sell the machine for what amount? A. $980 B. $391 C. $1,186 D. $ 68 E. $550
Note: - You are attempting question 8 MNO company is evaluating a proposal for purchase of equipment which will cost S180,000. The cash inflows from the use of equipment is given below: Year Cash flow S60,000 $40,000 S70,000 $125,000 $35,000 1 3 4 Payback period for the proposal is: а. 3 years b. 2 years с. 4 years d. 3.08 years
Bunnings Ltd is considering to invest in one of the two following projects to buy a newequipment. Each equipment will last 5 years and have no salvage value at the end. Thecompany’s required rate of return for all investment projects is 8%. The cash flows of theprojects are provided below.Equipment 1 Equipment 2Cost $186,000 $195,000Future Cash FlowsYear 1Year 2Year 3Year 4Year 586 00093 00083 00075 00055 00097 00084 00086 00075 00063 000Required:a) Identify which option of equipment should the company accept based onProfitability Index? b) Identify which option of equipment should the company accept based ondiscounted pay back method if the payback criterion is maximum 2 years? Do not use excel calculations
Bunnings Ltd is considering to invest in one of the two following projects to buy a new equipment. Each equipment will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 8%. The cash flows of the projects are provided below.Equipment 1 Equipment 2Cost $186,000 $195,000Future Cash FlowsYear 1Year 2Year 3Year 4Year 586 00093 00083 00075 00055 00097 00084 00086 00075 00063 000Identify which option of equipment should the company accept based ondiscounted pay back method if the payback criterion is maximum 2 years?
The company ABC AS is considering investing in a 3D printer. The acquisition takes place on 31.12 year 0 The investment will have the assumptions described in the table on the left. Show the investment's annual cash flow in a table of the number of life years. Purchase of 3D 2 000 000 Freight in connection with the investment 75 000 Adjustments in connection with the investment 30 000 Increased income per year 275 000 Fixed payable costs per year 60 000 Distribution value at the end of the year 5 200 000 Lifetime (number of years) 5
Harper Corporation has the following information about the purchase of a new piece of equipment: Cash revenues less cash expenses $50,000 per yearCost of equipment $130,000Salvage value at the end of the 8 th year $22,000Increase in working capital requirements $35,000Tax rate 25 percentLife 8 years The cost of capital is 13 percent. Required:iii. Calculate the after-tax payback period.iv. Calculate the accrual accounting rate of return on original investment for each of the eightyears.v. Calculate the net present value (NPV).vi. Calculate the internal rate of return (IRR).
•A company is about to embark on a two year project. Estimates of relevant inflows and outflows in current terms are as follows: Year 1 Year 2 £ £ Sales 50,000 50,000 Costs 30,000 32,000 •The following inflation rates are applicable to the flows: Sales 6% pa Costs 4% pa •Tax is payable at 28% on net flows. Capital allowances may be ignored. •The initial investment in the project at t0 is £20,000. •The money cost of capital is 10% pa. Required: (a) Calculate the NPV of the project. (b) Assess the sensitivity of the investment decision to changes in sales revenue.
3 IS Book Ask rint rences to search Answer each independent question, (a) through (e), below. a. Project A costs $7,000 and will generate annual after-tax net cash inflows of $2,850 for 5 years. What is the payback period for this investment under the assumption that the cash inflows occur evenly throughout the year? (Round your answer to 2 decimal places.) b. Project B costs $7,000 and will generate after-tax cash inflows of $950 in year 1, $1,850 in year 2, $2,900 in year 3, $2,850 in year 4, and $2,900 in year 5. What is the payback period (in years) for this investment assuming that the cash inflows occur evenly throughout the year? (Round your answer to 2 decimal places.) c. Project C costs $7,000 and will generate net cash inflows of $3,250 before taxes for 5 years. The firm uses straight-line depreciation with no salvage value and is subject to a 30% tax rate. What is the payback period under the assumption that all cash inflows occur evenly throughout the year? (Round your…