Question 6.EX.2.1: Calculation of the return on capital employed Carbon plc i...
Calculation of the return on capital employed
Carbon plc is planning to buy a new machine and has found two which meet its needs. Each machine has an expected life of five years. Machine 1 would generate annual cash flows (receipts less payments) of £210,000 and would cost £570,000. Its scrap value at the end of five years would be £70,000. Machine 2 would generate annual cash flows of £510,000 and would cost £1,616,000. The scrap value of this machine at the end of five years would be £301,000. Carbon plc uses the straight-line method of depreciation and has a target return on capital employed of 20 per cent.
Calculate the return on capital employed for both Machine 1 and Machine 2 on an average investment basis and state which machine you would recommend, giving reasons.
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