Payback Accounting Rate of Return and NPV Question
Epicurus is an organisation that manufactures the "Relax and Enjoy". The organisation is currently considering the purchase of a new machine to avoid environmental fines.
The production director has been considering a number of machines and the most appropriate costs £210,000. The machine will have a useful life of 5 years and is expected to be able to be sold at that time for £20,000. The machine is also more efficient than the one currently used, and the production director anticipates that there will be the following reductions in costs:
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Budget Heading
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Saving
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Labour
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2 employees at £27,500 each, these employee costs will be saved in year 1
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Electricity
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Year 1& 2 £17,500 each year
Years 3 4 & 5 £20,500 each year
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Reduction in re-workings
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Years 1,2 & 3 £14,000 each year
Years 4 & 5 £17,000 each year
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Reduction in maintenance costs
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Years 1 & 2 £7,500
Years 3, 4 & 5 £5,000
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The organisation's cost of capital is 12%
Required:
Question 1. Calculate the payback period for the project in years and months
Question 2. Calculate the projects Accounting Rate of Return.
Question 3. Calculate the NPV of the project.