ASD Ltd is considering the purchase of a new machine. Two options have been suggested, each costing $400,000. Earnings after taxation but before depreciation are expected to be as follows:
|
Year
|
Machine X $
|
Machine Y $
|
|
1
2
3
4
5
|
40,000
120,000
160,000
240,000
160,000
|
120,000
160,000
200,000
120,000
80,000
|
On this base, you are required:
a) Compute the Pay-back Period and
b) The Company has a target rate of return on capital @10%. Calculate NPV.
c) To compare profitability index of the machines and state which option you consider financially favourable