The senior management of a textile industrial company wishes to purchase a modern and advanced...
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Accounting
The senior management of a textile industrial company wishes to purchase a modern and advanced machine. After placing the bid, the company received two offers from some international companies specialized in this field. The presentations included the following information:
Presentation (A) Presentation (B) Information Initial investment cost 3000 5000 The value of the replacement at the end of its productive life is 800 1000 Productive life in the year 4 5 Annual cash flow before depreciation and tax 1000 1500
If you know that: The company adopts the straight-line method in calculating the annual depreciation share (ie, capital consumption). The income tax is estimated at 20% of the annual revenue. The discount rate used is 10%.
The following is required: 1. Determine which of the two alternatives is the best, using: a. Payback period according to the cumulative sum of current cash flows method. b. Payback period according to the mean method of current cash flows. c. Net Present Value (NPV) Net Present Value d. Profitability Index e. Cost-benefit analysis f. Internal Rate of Return (IRR)
2. Which of the two alternatives is economically acceptable to this company according to the previous criteria, and why.
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