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2 of 3 Question 2 Omake Lid is considering purchasing or investing in a new machine, either machine X or machine Y. However, a condition of capital rationing exits in the company (meaning due to availability of funds they can either invest in machine X or machine Y and not both), and hence the need for capital budgeting appraisal Both machines would have an expected life of five years and would be depreciated on a straight line basis. The following information is watable Machine X Machine Y Initial cost (5) 45 000 56 000 Residual value 5000 8000 Machine X Machine Accounting profits (5) $) Year 1 6000 5 000 Year 2 7000 6000 Year 3 8000 4000 7000 Year 5 3000 4000 Better Limited cost of capital is 10% per annum for which the discount factors are: Year 1 0.909 Year 2 0.825 Year 3 0.751 Year 4 0.683 0.621 Required (a) For both machines X and Y calculate The accounting rate of return (based on average capital employed). (4 marks) 7000 Year 4 Year 5 Payback period (4 marks) chuyet present value (NPV) (10 marks) (b) Recommend with reasons which machine should be purchased (3 marks) (c) State the disadvantages of both the accounting rate of return and the payback period as capital investment appraisal techniques (4 marks) (Total: 25 marks)

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