A
3
Triumph plc is planning to buy a new highly automatic machine to
achieve its target demand for its new product, Product M21. This
machine will cost $10,000,000 and its useful life is four years, at
the end of which time it will be sold for $1,000,000. The forecast
sales for the Product M21 is as follows:
Year
1
2
3
4
Sales
in units
80,000
120,000
300,000
200,000
The
estimated costs structure of the Product M21 is as follows:
Selling Price $100.00 per unit
Variable Costs $ 40.00 per unit
Annual
Fixed Overheads $160,000 per year
Additional Sales promotion expenses will have to be incurred as
under:
Year
1
2
3
4
Expenses in each year
3.000.000
1,500,000
1,000,000
400.000
Other
information
The
company has a target return on capital employed of 20%.
Depreciation is provided using the straight-line method .
Required
(a)
Calculate the Payback Period of the machine and comment on your
findings.
(b)
Calculate the accounting rate of return based on the average
investment and comment on your findings.