Question - The Vivek & Co. Ltd is considering the purchase of a new machine. Two options have been suggested, each costing Rs. 400,000. Earnings after taxation but before depreciation are expected to be as follows
|
Year
|
Machine X Rs.
|
Machine Y Rs.
|
|
1
|
40,000
|
120,000
|
|
2
|
120,000
|
160,000
|
|
3
|
160,000
|
200,000
|
|
4
|
240,000
|
120,000
|
|
5
|
160,000
|
80,000
|
The Company has a target rate of return on capital @ 10% and Depreciation rate is 20% (straight line method). On this base, you are required
a) To compare profitability of the machines and state which option you consider financially favourable.
b) Also work the Pay-back Period and
c) ARR for each project.