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Compare profitability of the machines

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Reference no: EM132106986

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.

Reference no: EM132106986

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