A company is manufacturing a consumer product, the demand for which at current price is in excess of
- Posted:
- 3+ months ago by rahul-ravi
- Topics:
- machine, price, company, production, current, product, replacement, consumer, capacity
Details:
... its ability toproduce. The capacity of a particular machine, now due for replacement, is the limiting factor on production. Thepossibilities exist either of acquiring a similar machine (Project X) or of purchasing a more expensive machine withgreater capacity (Project Y). The cash flows under each alternative have been estimated and given below. Thecompany’s opportunity cost of capital is 16%, after tax. In deciding between the two alternatives the ManagingDirector favors the ‘pay back method’. The Chief Accountant, however, thinks that a more specific method shouldbe used and he has calculated for each project
:i)The Net Present Value
ii)The Profitability Index
iii)The Discounted Pay Back Period
Having made these calculations, however, he finds himself still uncertain about which project to recommended.You are required to make these calculations and to discuss their relevance to the decision to be taken. The relevantcashflows are:
Year Project X Project Y
0 135000 240000
1 … 60000
2 30000 84000
3 132000 96000
4 84000 102000
5 84000 90000
Added 3+ months ago:
A company is manufacturing a consumer product, the demand for which at current price is in excess of its ability toproduce. The capacity of a particular machine, now due for replacement, is the limiting factor on production. Thepossibilities exist either of acquiring a similar machine (Project X) or of purchasing a more expensive machine withgreater capacity (Project Y). The cash flows under each alternative have been estimated and given below. Thecompany’s opportunity cost of capital is 16%, after tax. In deciding between the two alternatives the ManagingDirector favors the ‘pay back method’. The Chief Accountant, however, thinks that a more specific method shouldbe used and he has calculated for each project
:i)The Net Present Value
ii)The Profitability Index
iii)The Discounted Pay Back Period
Having made these calculations, however, he finds himself still uncertain about which project to recommended.You are required to make these calculations and to discuss their relevance to the decision to be taken. The relevantcashflows are:
Year Project X Project Y
0 135000 240000
1 … 60000
2 30000 84000
3 132000 96000
4 84000 102000
5 84000 90000
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