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Target rate of return on capital

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Reference no: EM131026118

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

Reference no: EM131026118

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