Vista Limited intends purchasing a new machine and has a choice between the following two machines: Equipment A Equipment B Initial cost R220 000 R240 000 Expected useful life Scrap value Expected net cash inflows: 5 years 5 years Nil Nil End of: Year 1 55 000 70 000 Year 2 60 000 70 000 Year 3 62 000 70 000 Year 4 60 000 70 000 Year 5 70 000 70 000 The company estimates that its cost of capital is 12%. Required: 2.1 Calculate the Payback Period of both equipment. (Answers must be expressed in years, months and days). 2.2 Calculate the Accounting Rate of Return (on initial investment) for both equipment A and B. (Answers must be expressed to 2 decimal places). 2.3 Calculate the Net Present Value of each equipment. (Round off amounts to the nearest Rand.) 2.4 Calculate the Internal Rate of Return of Equipment B.
Vista Limited intends purchasing a new machine and has a choice between the following two machines: Equipment A Equipment B Initial cost R220 000 R240 000 Expected useful life Scrap value Expected net cash inflows: 5 years 5 years Nil Nil End of: Year 1 55 000 70 000 Year 2 60 000 70 000 Year 3 62 000 70 000 Year 4 60 000 70 000 Year 5 70 000 70 000 The company estimates that its cost of capital is 12%. Required: 2.1 Calculate the Payback Period of both equipment. (Answers must be expressed in years, months and days). 2.2 Calculate the Accounting Rate of Return (on initial investment) for both equipment A and B. (Answers must be expressed to 2 decimal places). 2.3 Calculate the Net Present Value of each equipment. (Round off amounts to the nearest Rand.) 2.4 Calculate the Internal Rate of Return of Equipment B.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:QUESTION 2
INFORMATION:
Vista Limited intends purchasing a new machine and has a choice between the following two machines:
Equipment A
Equipment B
Initial cost
R220 000
R240 000
Expected useful life
Scrap value
Expected net cash inflows:
5 years
5 years
Nil
Nil
End of:
Year 1
55 000
70 000
Year 2
60 000
70 000
Year 3
62 000
70 000
Year 4
60 000
70 000
Year 5
70 000
70 000
The company estimates that its cost of capital is 12%.
Required:
2.1 Calculate the Payback Period of both equipment. (Answers must be expressed in years, months and days).
2.2 Calculate the Accounting Rate of Return (on initial investment) for both equipment A and B. (Answers must
be expressed to 2 decimal places).
2.3 Calculate the Net Present Value of each equipment. (Round off amounts to the nearest Rand.)
2.4 Calculate the Internal Rate of Return of Equipment B.
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