Payback Accounting Rate Of Return And NPV Question -
Payback Accounting Rate of Return and NPV Question
Epicurus is an organisation that manufactures the "Relax and Enjoy". The organisation is currently considering the purchase of a new machine to avoid environmental fines.
The production director has been considering a number of machines and the most appropriate costs £210,000. The machine will have a useful life of 5 years and is expected to be able to be sold at that time for £20,000. The machine is also more efficient than the one currently used, and the production director anticipates that there will be the following reductions in costs:
|
Budget Heading |
Saving |
|
Labour |
2 employees at £27,500 each, these employee costs will be saved in year 1 |
|
Electricity |
Year 1& 2 £17,500 each year Years 3 4 & 5 £20,500 each year |
|
Reduction in re-workings |
Years 1,2 & 3 £14,000 each year Years 4 & 5 £17,000 each year |
|
Reduction in maintenance costs |
Years 1 & 2 £7,500 Years 3, 4 & 5 £5,000 |
The organisation`s cost of capital is 12%
Required:
Question 1. Calculate the payback period for the project in years and months
Question 2. Calculate the projects Accounting Rate of Return.
Question 3. Calculate the NPV of the project.
