Reference no: EM133018954
Question - Assume a company that manufactures door locks is considering the acquisition of additional machinery that will enable it to produce and sell more locks.
The company is evaluating two proposals.
Proposal 1: involves the purchase of an equipment that costs M50 000 and is expected to contribute an annual net cash inflow of M18 000 per year during the equipment's four-year estimated useful life.
Proposal 2: involves the purchase of an equipment that will cost M35 000 and is expected to contribute the following additional net cash inflows during the equipment's three-year estimated useful life.
Year M
1 15,000
2 15,000
3 20,000
The cost of capital is assumed to be 12%. Neither of the equipment that costs M50,000 or M35,000 is expected to have any scrap value.
Required -
a) Determine the net present value of each proposal
b) Assuming there is capital rationing, indicate the proposal that should be undertaken and give ONE reason for your answer.
c) If the cost of capital increases to 15%, indicate the proposal that should be undertaken and give ONE reason for your answer.
d) Using TWO reasons explain why cash is preferred to profit.
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