# Disadvantages Of Amoke Manufacturing Company

1113 Words 5 Pages
Disadvantages of Profitability Index 1. It is difficult to understand interest rate or discount rate. 2. It is difficult to calculate profitability index if two projects having different useful life

Practicing Question

Question One
Obi Plc. is contemplating investment in a new concrete crushing machine in order to recycle rubble from demolished buildings into road chippings. It is estimate that the crushing machine will cost N210,000 payable immediately, have a useful life of 5 years with a residual value of N25,000. Net cash inflows for each of the next 5 years from the sale of recycled rubble are projected as:
Year Net Cash flows 10% present value factors 15% present value factors.

1. 40,000 0.909 0.870
2. 50,000 0.826 0.756
3. 60,000 0.751 0.658
80,000 0.621 0.497

Required
Calculate the NPV of the investment if Obliteration Plc’s cost of capital is 10%.

Question Two
Calculate the IRR of the investment in the crushing machine in Question One above using 10% and 15% as the two cost of capital rates.
Question three
Amoke Manufacturing Company is planning to reduce its labor costs by automating. The automation requires the installation of a new machine. The cost to purchase and install a new machine is N15,000. The installation of machine can reduce annual labor cost by N4,200. The life of the machine is 15 years. The salvage value of the machine after fifteen years will be zero. The required rate of return of Smart Manufacturing Company is 25%.
Should Smart Manufacturing Company purchase the machine?

Question four company is considering the purchase of new machinery in order to achieve operating cost savings.
Two alternative machines are available. Machine A would cost N300,000 with a useful life of 6 years.Machine B would cost N180,000 but would require replacement with a new machine (at the same cost) after 3 years.
Operating cost savings (before charging depreciation for new machine) are forecast as follows: The cost of capital is 12% per annum.