Happy Meal Limited a food manufacturer is considering purchasing a new machine for £320,000. The company is expecting an annual cash inflow of £105,000 from the sale of products and an annual cash outflow of £15,500 for each of the six years of the machine’s useful life. The annual cash outflows do not include annual depreciation charges for the machine.
The machine is depreciated using a15% reducing method. The machine is expected to last for sixyears, with a residual value estimated to be at the rate of 10% of the original cost of the machine. The cost of capital for Happy Meal Limited is 12%.You are required to:(a) Calculate using the following investment appraisal techniques, and provide briefrecommendations as to the economic feasibility of acquiring the machine:
i.The Payback Period.
ii.The Accounting Rate of Return.
iii.The Net Present Value.
iv.The Internal Rate of Return (to two decimal places)(20 marks)
(b) Critically evaluate the benefits and limitations of each of the differing investment appraisal techniques, ensuring the response is supported with relevant academic research.
