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[solution]: QUESTION 1 (25)Barker Limited has the choice of purchasing one of


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QUESTION 1 (25)Barker Limited has the choice of purchasing one of two machines viz. machine P and machine Q. Both machines have a five-year life with no residual value. The annual volume of production for both machines is estimated at 600 000 units, which can be sold at R12 per unit. Depreciation is calculated on the machine using the straight-line method.

Machine P costs R 9 000 000. Its annual operating costs are estimated at R800 000(excluding depreciation). Fixed costs are estimated at R3 600 000.

Machine Q costs R9 600 000. Its annual operating costs are estimated at R720 000(excluding depreciation).Fixed costs are the same as machine P.

The cost of capital may be assumed at 14%.

Required:1.1.1 Use the net present value method to determine and justify which machine should be selected by the company.

 


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