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Sales volume reaches the maximum capacity of the new machine in Year 4.
The positive NPV point to that the investment in Machine Two is financially acceptable although the NPV is so small that there is likely to be a significant possibility of a negative NPV.
WORKINGS
Writing down allowances as well as tax benefits
(c)
Total taxable cash flow = (48100 + 68214 + 90040 + 113234) = $319588
Total depreciation = $215000
Total accounting profit = 319588 - 215000 = $104588
Average annual accounting profit = 104588/4 = $26147
Average investment = 215000/2 = $107500
Return on capital employed = 100 × 26147/107500 = 24·3%
ROCE of 24·3% is somewhat less than the target ROCE of 25% indicating that buying the machine isn't acceptable with respect to this criterion. though evaluation using the net present value approach is preferred for investment advice.
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