in order to produce a component XYZ has to purchase a machine at a cost of N280,000 at the end of 2000. the machine is to be used for 4 years after…

in order to produce a component XYZ has to purchase a machine at a cost of N280,000 at the end of 2000. the machine is to be used for 4 years after which it will be disposed of for N5000. Demand for the component to be produced is 38,000,42,000,50,000 and 23,000 units in 2001,2002,2003 & 2004 respectively . Selling price of the component is put at N11 per unit and variable cost of production is N7.50perunit with incremental annual fixed overheads of N35,000. all of these are quoted in current terms. the general rate of inflation over the relevant period is expected to be 5% per year but XYZ have forecast that their selling price and cost will inflate as follows each year ; Selling price 3% , varibale cost 4% and fixed production overheads 6%.XYZ is aware their investors are expecting a real rate of return of 5.7% perannum. The company operates with a target capital employed of 20% and depreciation is charged on a straight line basis over the life of the asset. 1. calculate the net present value of buying the machine and comment on your findings 2. calculate the accounting rate of return (based on average investment)of the investment and comment on your findings .

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