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Capital Budgeting: Replacement Decision

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Clegg is replacing one of his machines. He can choose between machine A or machine B. Details of the machines are as follows... Please see attached.


a) Calculate the accounting rate of return (ARR) for each machine.
b) Calculate the payback period for each machine.
c) Calculate the net present value (NPV) of each machine.

The new machine must produce an internal rate of return (IRR) of at least 22%
d) Prepare calculations to show the internal rate of return (IRR) produced by each machine.
e) State which machine Clegg should purchase. Give your reasons
f) Suggest why Clegg requires the new machine to produce an IRR of at least 22% if it already produces a positive NPV.

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Solution Summary

Calculates accounting rate of return (ARR), payback period, net present value (NPV), internal rate of return (IRR).

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