solution

been suggested, each costing GH¢400,000. Earnings after taxation but before depreciation are expected to be as follows
Year
Machine X
GHC
Machine Y
GHC.

1
2
3
4
5
40,000
120,000
160,000
240,000
160,000
120,000
160,000
200,000
120,000
80,000

The Company has a target rate of return on capital @ 10% and Depreciation rate is 20% (straight line method). On this base, you are required
a) Compare the profitability index of the machines and state which option you consider financially favourable
b) Calculate the Pay-back Period (PB) for each project
c) Calculate the return on capital employed (ROCE) for each project.
d) Internal Rate of Return (IRR) for each project

The Vivek & Co. Ltd is considering the purchase of a new machine. Two options have been suggested, each costing GH¢400,000. Earnings after taxation but before depreciation are expected to be as follows
Year
Machine X
GHC
Machine Y
GHC.

1
2
3
4
5
40,000
120,000
160,000
240,000
160,000
120,000
160,000
200,000
120,000
80,000

The Company has a target rate of return on capital @ 10% and Depreciation rate is 20% (straight line method). On this base, you are required
a) Compare the profitability index of the machines and state which option you consider financially favourable
b) Calculate the Pay-back Period (PB) for each project
c) Calculate the return on capital employed (ROCE) for each project.
d) Internal Rate of Return (IRR) for each project