Answer to Question #126756 in Economics for Kgothatso

Question

machine which has been in operation in the factory for the last 5 years. Ignoring interest but
considering tax at 50% of net earnings, suggest which of the two alternatives should be
preferred. The following are the details:
Details Old machine New machine
Purchase price R40 000 R60 000
Useful life 10 years 10 years
Running hours per year 2 000 2 000
Units per hour 24 36
Wages per running hour R3 R5.25
Power per annum R2 000 R4 500
Consumables per month R500 R625
All other charges per month R666.67 R750
Material cost per unit R0.50 R0.50
Selling price per unit R1.25 R1.25
Depreciation is charged on a straight line basis.
Required:
1.1 (8 points) Compare accounting profits for both old and new machine.
1.2 (8 points) Assess the returns on i) original investment, ii) average investment method
and return on incremental investment.
1.3 (4 points) Draft a recommendation on whether the old machine should be replaced or
not.

Answer 1

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