Question 4,(8 Marks) Capital Budgeting The GDK Corporation has budgeted 1,000,00
ID: 2579434 • Letter: Q
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Question 4,(8 Marks) Capital Budgeting The GDK Corporation has budgeted 1,000,000 for a new capita expenditure in production machinery. The oompany has estimated the following net cash inflows from the use of the new machinery Machine Machine Machine Machine Machine Cost Y1 Y2 Y3 Y4 Y5 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 100,000 300,000 200,000 100,000 100,000 200,000 100,000 600,000 400,000 100,000 0 5,000 100,000 0 700,000 00,000 400,000 200,000 100,000 200,000 400,000 100,000 600,000 400,000 400,000 1. Calculate the Payback period and disclose which machine is best investment (2.5 Marks) 2. Calculate the Net Present value and disclose which machine(s) are selected. The Present Value Interest Factor is 10%. (Y1: 0.9000, Y2 0.8264, Y3 07513, Y4-0630, Y5-06209) (3 Marks) 3. Determine the direction of the Intermal Rate of Return. (1 Mark) Calculate the Profitability index and seledt the best investment. (1.5 Marks)Explanation / Answer
Answer 1. Payback period - Machine A Year Intial Invetments Cash Inflow Accumulated Net Cash Inflow 0 1,000,000 - - 1 100,000 100,000 2 200,000 300,000 3 400,000 700,000 4 600,000 1,300,000 5 100,000 1,400,000 Payback period = 3 Years + (300,000 / 600,000 x 1 Year) Payback period = 3 Years + 0.50 Payback period = 3.50 Years (Approx.) Payback period - Machine B Year Intial Invetments Cash Inflow Accumulated Net Cash Inflow 0 1,000,000 - - 1 300,000 300,000 2 100,000 400,000 3 100,000 500,000 4 400,000 900,000 5 400,000 1,300,000 Payback period = 4 Years + (100,000 / 400,000 x 1 Year) Payback period = 4 Years + 0.25 Payback period = 4.25 Years (Approx.) Payback period - Machine C Year Intial Invetments Cash Inflow Accumulated Net Cash Inflow 0 1,000,000 - - 1 200,000 200,000 2 600,000 800,000 3 - 800,000 4 400,000 1,200,000 5 200,000 1,400,000 Payback period = 3 Years + (200,000 / 400,000 x 1 Year) Payback period = 3 Years + 0.50 Payback period = 3.50 Years (Approx.) Payback period - Machine D Year Intial Invetments Cash Inflow Accumulated Net Cash Inflow 0 1,000,000 - - 1 100,000 100,000 2 400,000 500,000 3 500,000 1,000,000 4 - 1,000,000 5 100,000 1,100,000 Payback period = 3 Years Payback period - Machine E Year Intial Invetments Cash Inflow Accumulated Net Cash Inflow 0 1,000,000 - - 1 100,000 100,000 2 100,000 200,000 3 100,000 300,000 4 700,000 1,000,000 5 200,000 1,200,000 Payback period = 4 Years Machine Payback Period A 3.50 Years B 4.25 Years C 3.50 Years D 3.00 Years E 4.00 Years Best Investment = Machine D (Lowest Payback Period) Answer 2. Year 0 1 2 3 4 5 Machine A Cash Inflow (1,000,000) 100,000 200,000 400,000 600,000 100,000 PV Factor - 10% 1.0000 0.9090 0.8264 0.7513 0.6830 0.6209 Present Value (1,000,000) 90,900 165,280 300,520 409,800 62,090 NPV 28,590 Machine B Cash Inflow (1,000,000) 300,000 100,000 100,000 400,000 400,000 PV Factor - 10% 1.0000 0.9090 0.8264 0.7513 0.6830 0.6209 Present Value (1,000,000) 272,700 82,640 75,130 273,200 248,360 NPV (47,970) Machine C Cash Inflow (1,000,000) 200,000 600,000 - 400,000 200,000 PV Factor - 10% 1.0000 0.9090 0.8264 0.7513 0.6830 0.6209 Present Value (1,000,000) 181,800 495,840 - 273,200 124,180 NPV 75,020 Machine D Cash Inflow (1,000,000) 100,000 400,000 500,000 - 100,000 PV Factor - 10% 1.0000 0.9090 0.8264 0.7513 0.6830 0.6209 Present Value (1,000,000) 90,900 330,560 375,650 - 62,090 NPV (140,800) Machine E Cash Inflow (1,000,000) 100,000 100,000 100,000 700,000 200,000 PV Factor - 10% 1.0000 0.9090 0.8264 0.7513 0.6830 0.6209 Present Value (1,000,000) 90,900 82,640 75,130 478,100 124,180 NPV (149,050) Machine C - Highest NPV Answer 3. Year Machine A Machine B Machine C Machine D Machine E Intial Investment 0 (1,000,000) (1,000,000) (1,000,000) (1,000,000) (1,000,000) Expcted Net Cash inflow 1 100,000 300,000 200,000 100,000 100,000 2 200,000 100,000 600,000 400,000 100,000 3 400,000 100,000 - 500,000 100,000 4 600,000 400,000 400,000 - 700,000 5 100,000 400,000 200,000 100,000 200,000 Internal Rate of Return 10.98% 8.31% 13.03% 3.71% 5.14% Machine C - Highest IRR Answer 4. Profitability Index = PV of Cash Inflow / Intial Investment Machine A Machine B Machine C Machine D Machine E PV OF Cash Inflow 1,028,590.00 952,030.00 1,075,020.00 859,200.00 850,950.00 Intial Investment required 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00 Profitability Index 1.03 0.95 1.08 0.86 0.85 Machine C - Highest Profitability Index
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