### Target rate of return on capital

##### Reference no: EM131026118

ASD Ltd is considering the purchase of a new machine. Two options have been suggested, each costing \$400,000. Earnings after taxation but before depreciation are expected to be as follows:

 Year Machine X\$ Machine Y\$ 1 2 3 4 5 40,000 120,000 160,000 240,000 160,000 120,000 160,000 200,000 120,000 80,000

On this base, you are required:

a) Compute the Pay-back Period and

b) The Company has a target rate of return on capital @10%. Calculate NPV.

c) To compare profitability index of the machines and state which option you consider financially favourable

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