The directors of Madura limited are contemplating the purchase of new machine to replace a machine which has been in operation in the factory for the last 5 years. Ignoring interest but considering tax at 50% of net earnings, suggest which of the two alternatives should be preferred. The following are the details: Details Old machine New machine Purchase price R40 000 R60 000 Useful life 10 years 10 years Running hours per year 2 000 2 000 Units per hour 24 36 Wages per running hour R3 R5.25 Power per annum R2 000 R4 500 Consumables per month R500 R625 All other charges per month R666.67 R750 Material cost per unit R0.50 R0.50 Selling price per unit R1.25 R1.25 Depreciation is charged on a straight line basis. Required: 1.1 Compare accounting profits for both old and new machine. 1.2 Assess the returns on i) original investment, ii) average investment method and return on incremental investment. 1.3 Draft a recommendation on whether the old machine should be replaced or not. SECTION B 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 method
The directors of Madura limited are contemplating the purchase of new machine to replace a
machine which has been in operation in the factory for the last 5 years. Ignoring interest but
considering tax at 50% of net earnings, suggest which of the two alternatives should be
preferred. The following are the details:
Details Old machine New machine
Purchase price R40 000 R60 000
Useful life 10 years 10 years
Running hours per year 2 000 2 000
Units per hour 24 36
Wages per running hour R3 R5.25
Power per annum R2 000 R4 500
Consumables per month R500 R625
All other charges per month R666.67 R750
Material cost per unit R0.50 R0.50
Selling price per unit R1.25 R1.25
Required:
1.1 Compare accounting profits for both old and new machine.
1.2 Assess the returns on i) original investment, ii) average
and return
1.3
Draft a recommendation on whether the old machine should be replaced or
not.
SECTION B
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
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)
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 13 images
