MACHACHA PLC is a reputable company in the manufacturing industry and has a significant market share. The management of the company has identified the need to replace their machinery in the Production...

 MACHACHA PLC is a reputable company in the manufacturing industry and has a significant market share. The management of the company has identified the need to replace their machinery in the Production Department, with a view of enhancing its productivity. Two mutually exclusive models are being considered for investment, these being Model A and Model B. You are told that funds are only available for one proposal. This means the management of MACHACHA PLC has to make a choice between the proposals being considered for capital expenditure. The following details are available on the proposals:

                                                             MODEL AMODEL B

                                                                K000                   K000

Initial Capital outlay                            1000000                 1500000

Projected Net Cash Flows:

Year  1                                                   480000                  320000

,,        2                                                    200000                 300000

,,        3                                                     200000                 600000

,,       4                                                       100000                200000

,,       5                                                     300000                 240000

,,       6                                                    160000                  500000

Scrap value                                             40000                    160000

The company’s cost of capital is 12%. It depreciates all its tangible non- current assets on straight line basis. It is the policy of the company not to add the scrap value to the net cash inflow at the end of each proposal’s economic life.

        REQUIRED:

1. Calculate for both models


2. The Payback period (Conventional or Traditional) in years to two decimal places


3. The Net Present Value ( NPV)


4. The Profitability Index (PI) to two decimal places

• The Accounting Rate of Return (ARR) to two decimal places

1. Internal Rate of Return (IRR) to two decimal places

b). Recommend to the management of MACHACHA PLC as to which proposal should be financed , giving your reasons