Answer to Question #298425 in Economics for Mary

Question

XYZ Ltd. is considering the purchase of new machine. Two alternative machines (A & B) have been

suggested, each having initial cost of Rs. 10,00,000 and requiring Rs. 50,000 as additional working capital at

the end of 1st year. Net cash flows are expected to be as follows:

Year Machine A (in Rs.) Machine B (in Rs.)

1 1,00,000 3,00,000

2 4,00,000 6,00,000

3 4,00,000 3,00,000

4 4,00,000 5,00,000

5 3,00,000 2,00,000

The company has target return on capital of 10% and on this basis you are required to compare the

profitability of the machines and state which alternative you consider to be financially preferable.

Answer 1

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