Question

A company is considering the purchase of a machine. There are two machines "X"
and Y'. The cost of these machines is Rs. 40,000 each. The earnings after tax are
as given below :
Year
1.
2.
3.
4.
5.
Machine 'X' (Rs.)
12,000
16,000
20,000
12,000
8,000
Machine 'Y' (Rs.)
4,000
12,000
16,000
24,000
16,000
Calculate :
(a) Payback period method
(b) Net present value method
Evaluate the alternatives 'X' or 'Y'according to these methods. The rate o
discount is 10%.
Afm help.60.000 vorio i 2007
bat.​

Answer 1

Answer:

To calculate the payback period, we need to determine how many years it will take for each machine to recoup its initial cost of Rs. 40,000.

For Machine X:

Year 1: Rs. 12,000

Year 2: Rs. 16,000

Year 3: Rs. 20,000

Year 4: Rs. 12,000

Year 5: Rs. 8,000

Total earnings after Year 3: Rs. 48,000

Total earnings after Year 4: Rs. 60,000

Therefore, the payback period for Machine X is 4 years.

For Machine Y:

Year 1: Rs. 4,000

Year 2: Rs. 12,000

Year 3: Rs. 16,000

Year 4: Rs. 24,000

Year 5: Rs. 16,000

Total earnings after Year 4: Rs. 56,000

Therefore, the payback period for Machine Y is between 4 and 5 years.

To calculate the net present value (NPV), we need to discount each year's earnings to their present value using the given discount rate of 10%.

For Machine X:

Year 1: Rs. 12,000 / (1+0.1)^1 = Rs. 10,909

Year 2: Rs. 16,000 / (1+0.1)^2 = Rs. 13,223

Year 3: Rs. 20,000 / (1+0.1)^3 = Rs. 15,265

Year 4: Rs. 12,000 / (1+0.1)^4 = Rs. 7,900

Year 5: Rs. 8,000 / (1+0.1)^5 = Rs. 5,287

NPV of Machine X = -Rs. 40,000 + Rs. 10,909 + Rs. 13,223 + Rs. 15,265 + Rs. 7,900 + Rs. 5,287 = Rs. 12,584

For Machine Y:

Year 1: Rs. 4,000 / (1+0.1)^1 = Rs. 3,636

Year 2: Rs. 12,000 / (1+0.1)^2 = Rs. 9,917

Year 3: Rs. 16,000 / (1+0.1)^3 = Rs. 11,512

Year 4: Rs. 24,000 / (1+0.1)^4 = Rs. 16,284

Year 5: Rs. 16,000 / (1+0.1)^5 = Rs. 10,798

NPV of Machine Y = -Rs. 40,000 + Rs. 3,636 + Rs. 9,917 + Rs. 11,512 + Rs. 16,284 + Rs. 10,798 = Rs. 12,147

Based on the payback period method, Machine X is preferable as it has a shorter payback period of 4 years compared to Machine Y's payback period of between 4 and 5 years.

Based on the net present value method, both machines have positive NPVs, but Machine X has a higher NPV of Rs. 12,584 compared to Machine Y's NPV of Rs. 12,147. Therefore, according to the net present value method, Machine X is preferable.