Machine A vs Machine B: Which One Should Trump Limited Choose?
Which machine offers a better payback period?
How long does it take for Machine A and Machine B to recover their initial investment?
Payback Period Analysis
Based on the data provided, the payback period for Machine A is approximately 3 years and 9 months. On the other hand, Machine B does not recover the initial investment within the 4-year expected useful life.
Machine A offers a more attractive payback period compared to Machine B. With Machine A, Trump Limited can expect to recoup the initial investment within 3 years and 9 months, making it a more efficient choice in terms of recovering costs.
To calculate the payback period, we need to consider the time it takes for each machine's net cash inflows to equal its initial investment. Machine A shows a quicker return on investment compared to Machine B, which fails to recover the initial investment within the expected useful life duration.
It's clear that Machine A presents a better option for Trump Limited in terms of the payback period, providing a faster turnaround on the initial investment, ensuring profitability in a shorter time frame.
What is the Accounting Rate of Return (ARR) for Machine A?
How does Machine A's ARR compare to the minimum required rate of return?
Accounting Rate of Return (ARR) Analysis
The Accounting Rate of Return (ARR) for Machine A is approximately 10.63%.
The Accounting Rate of Return (ARR) is calculated as the average annual net profit as a percentage of the initial investment. Machine A's ARR of 10.63% indicates the average annual net profit generated by the machine relative to the initial investment.
Comparing Machine A's ARR of 10.63% to the minimum required rate of return of 12%, we can see that Machine A falls slightly below the expected return rate. However, the ARR still provides valuable insight into the profitability of Machine A over its useful life.
In conclusion, despite Machine A's ARR being slightly lower than the minimum required rate of return, it remains a favorable choice over Machine B due to its superior payback period and overall efficiency in recovering the initial investment.