Question

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

Answer 1

The Payback period is the time period in which Initial investment will get recover from the project. If we consider the time value of money it is called Discounted payback period and if we don't consider the Time value of money it is called normal payback period