Reference no: EM132914717
Y to be used in a project. The funds to facilitate the purchase of the machines and the execution of the project will be generated from:
i. 1 million $1 Ordinary Shares with a market value of $1.00 per share and an estimated cost of 8%
ii. 1 million $1 Preference shares with a market value of 80cents and an estimated cost of 10%
iii. 5 million Debenture stock with a market value of $90 per 100 nominal value and an estimated cost of 5%
The following details were estimated for both machines:
Machine X Machine Y
Cost $1,000,000 $1,000,000
Estimated residual value $200,000 $200,000
Estimated life 4 years 4 years
Estimated future profits before depreciation
Year 1 $500,000 $200,000
2 $500,000 $300,000
3 $300,000 $500,000
4 $100,000 $500,000
1) Which machine would be purchased using the payback period? Why?
2) Using the ARR method, which of the two machines would be purchased? Explain
3) Based on the Net Present Value for each project, explain which machine would be selected.
4) Discuss the use of net present value as a method of long term investment appraisal.
5) What is the internal rate of return on both machines?
6) Discuss the use of the internal rate of return as the basis for selecting the preferred machine for long term investment.
7) Explain the meaning of the profitability index.
8) Explain which is the most appropriate method to use for selecting the preferred machine for the project.