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
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 2 3 4 5
40,000 120,000 160,000 240,000 160,000
120,000 160,000 200,000 120,000 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.
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