Reference no: EM133084926

Question - Namibia Trading Limited ("NTL") has the choice of purchasing one of two machines namely, Machine A and Machine B. Both machines have five year useful life, with only Machine A having a residual value of N$300,000. The annual volume of production for both machines is estimated at 200,000 units, which can be sold at N$20 per unit. Depreciation is calculated on the machines using the straight line method (cost method).

Machine A costs N$4,800,000 excluding installation cost of N$300,000. The annual operating costs are estimated at N$380,000 (excluding depreciation). A major overhaul at a cost of N$200,000 is expected to be undertaken at the end of year three. Fixed costs are estimated at N$2,100,000 (excluding depreciation).

Machine B costs N$5,100,000 including installation cost of N$400,000. The annual operating costs are estimated at N$330,000 (excluding depreciation). Fixed costs are the same as Machine A.

The weighted average cost of capital is 14%.

Required -

1. Calculate the payback period of Machine A and Machine B.

2. Use the net present value method to determine which machine should be purchased by the company.

3. Calculate the accounting rate of return (on average investment) of Machine B.