A container shipping company is considering investing in a truck mode of transportation with two alternative options, namely buying a new truck (A) and buying a used truck (B) which can still be used but the airbag safety system is damaged. Details of the costs and salvage value of each are shown in the following table: A B Investment Cost ($) Annual cost ($) 700,000 500,000 40,000 110,000 Salvage value ($) 175,000 125,000 Useful life (years) 5 Using the IRR method, make a choice-table for the above case!

A container shipping company is considering investing in a truck mode of transportation with two alternative options, namely buying a new truck (A) and buying a used truck (B) which can still be used but the airbag safety system is damaged. Details of the costs and salvage value of each are shown in the following table: A B Investment Cost ($) Annual cost ($) 700,000 500,000 40,000 110,000 Salvage value ($) 175,000 125,000 Useful life (years) 5 Using the IRR method, make a choice-table for the above case!

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter12: Capital Investment Decisions

Section: Chapter Questions

Problem 51P: Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new...

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Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new design will eliminate the production of a toxic solid residue. The initial cost of the system is estimated at 860,000 and includes computerized equipment, software, and installation. There is no expected salvage value. The new system has a useful life of 8 years and is projected to produce cash operating savings of 225,000 per year over the old system (reducing labor costs and costs of processing and disposing of toxic waste). The cost of capital is 16%. Required: 1. Compute the NPV of the new system. 2. One year after implementation, the internal audit staff noted the following about the new system: (1) the cost of acquiring the system was 60,000 more than expected due to higher installation costs, and (2) the annual cost savings were 20,000 less than expected because more labor cost was needed than anticipated. Using the changes in expected costs and benefits, compute the NPV as if this information had been available one year ago. Did the company make the right decision? 3. CONCEPTUAL CONNECTION Upon reporting the results mentioned in the postaudit, the marketing manager responded in a memo to the internal audit department indicating that cash inflows also had increased by a net of 60,000 per year because of increased purchases by environmentally sensitive customers. Describe the effect that this has on the analysis in Requirement 2. 4. CONCEPTUAL CONNECTION Why is a postaudit beneficial to a firm?
A truck, costing $101000 and uninsured, is wrecked its first day in use. It can be either (a) disposed of for $17500 cash and replace with a similar truck costing $103500 or (b) rebuilt for $89500 and thus be brand-new as far as operating characteristics and looks are concerned. Which action is less costly?
Waterway Industries is considering the replacement of a piece of equipment with a newer model. The following data has been collected: Old Equipment New Equipment Purchase price $229500 $382500 Accumulated depreciation 91800 - 0 - Annual operating costs 306000 244800 If the old equipment is replaced now, it can be sold for $61200. Both the old equipment’s remaining useful life and the new equipment’s useful life is 5 years. The company uses straight-line depreciation with a zero salvage value for all of its assets.For the 5-year period, what is the increase or decrease in net income associated with the new equipment? $91800` $(76500) $(15300) $61200
Vaughn Manufacturing is considering the replacement of a piece of equipment with a newer model. The following data has been collected: Old Equipment New Equipment Purchase price $220500 $367500 Accumulated depreciation 88200 - 0 - Annual operating costs 294000 235200 If the old equipment is replaced now, it can be sold for $58800. Both the old equipment’s remaining useful life and the new equipment’s useful life is 5 years. The company uses straight-line depreciation with a zero salvage value for all of its assets.For the 5-year period, what is the increase or decrease in net income associated with the new equipment? $88200` $58800 $(14700) $(73500)
A truck, costing $102,500 and uninsured, is wrecked its first day in use. It can be either (a) disposed of for $14,000 cash and replaced with a similar truck costing $105,500 or (b) rebuilt for $86,000 and thus be brand-new as far as operating characteristics and looks are concerned. Which action is less costly? Show your calculations.
Hybachi Company is trying to decide whether it should purchase new equipment and continue to make its subassemblies internally or if production should be discontinued and the subassembly purchased from an outside supplier. Either way production cannot continue using the current equipment. New equipment for producing the subassemblies can be purchased at a cost of $400,000. The equipment would have a five-year useful life (the company uses straight-line depreciation) and a $50,000 salvage value. Alternatively, the subassemblies could be purchased from an outside supplier. The supplier has offered to provide the subassemblies for $9 each under a five-year contract. Hybachi Company's present costs per unit of producing the subassemblies internally (with the old equipment) are given below. The costs are based on a current activity level of 40,000 subassemblies per year: Direct Materials $ 3.00…
Freida Company is considering an asset replacement project of replacing a control device. This old control device has been fully depreciated but can be sold for $5,000. The new control device, which is more automated, will cost $42,000. The new device’s installation and shipping costs will total $16,000. The new device will be depreciated on a straight-line basis over its 2-year economic life to an estimated salvage value of $0. The actual salvage value of this device at the end of 2-year period (That is, the market value of the device at the end of 2-year period) is estimated to be $4,000. If the replacement project is accepted, Freida will require an initial working capital investment of $2,200 (that is, adding $2,200 initially to its net working capital). During the 1st year of operations, Freida expects its annual revenue to increase from $72,800 to $90,000. After the 1st year, revenues from the replacement are expected to increase at a rate of $2,800 a year for the remainder of…
Delaney Company is considering replacing equipment which originally cost $508,000 and which has $355,600 accumulated depreciation to date. A new machine will cost $727,000. What is the sunk cost in this situation? a.$152,400 b.$574,600 c.$508,000 d.$121,920
Crane Corp. is considering purchasing one of two new processing machines. Either machine would make it possible for the company to produce its products more efficiently than it is currently equipped to do. Estimates regarding each machine are provided below: Machine A Machine B Original cost $113,900 $278,300 Estimated life 10 years 10 years Salvage value -0- -0- Estimated annual cash inflows $29,700 $60,100 Estimated annual cash outflows $7,600 $14,800 Calculate the net present value and profitability index of each machine. Assume an 8% discount rate. Machine A Machine B Net present value top row, profitability index bottom row Which machine should be purchased? Crane Corp. should purchase select a machine .
A company is trying to decide between two different conveyor belt systems. System A costs $300,000, has a 4-year life, and requires $101,000 in pretax annual operating costs. System B costs $380,000, has a 6-year life, and requires $95,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Whichever project is chosen, it will not be replaced when it wears out. The tax rate is 22 percent and the discount rate is 10 percent. A. Calculate the NPV for both conveyor belt systems. (Do not round intermediate calculations ) B. Which conveyor belt system should the firm choose? Please use excel and show equations used.
Air Links, a commuter airline company, isconsidering replacing one of its baggage-handlingmachines with a newer and more efficient one. Thecurrent book value of the old machine is $50,000, andit has a remaining useful life of five years. The salvage value expected from scrapping the old machineat the end of five years is zero, but the company cansell the machine now to another firm in the industryfor $10,000. The new baggage-handling machine hasa purchase price of $120,000 and an estimated usefullife of seven years. It has an estimated salvage valueof $30,000 and is expected to realize economic savings on electric power usage, labor, and repair costsand also to reduce the amount of damaged luggage.In total, an annual savings of $50,000 will be realizedif the new machine is installed. The firm uses a 15%MARR. Using the opportunity cost approach,(a) What is the initial cash outlay required for thenew machine?(b) What are the cash flows for the defender in yearszero through five?(c)…
Westwood Furniture Company is considering the purchase of two different items of equipment, as describedbelow:Machine AA compacting machine has just come onto the market that would permit Westwood Furniture Company tocompress sawdust into various shelving products. At present the sawdust is disposed of as a waste product.The following information is available on the machine:a. The machine would cost $420,000 and would have a 10% salvage value at the end of its 12-year usefullife. The company uses straight-line depreciation and considers salvage value in computing depreciationdeductions.b. The shelving products manufactured from use of the machine would generate revenues of $300,000per year. Variable manufacturing costs would be 20% of sales.c. Fixed expenses associated with the new shelving products would be (per year): advertising, $40,000;salaries, $110,000; utilities, $5,200; and insurance, $800.Machine BA second machine has come onto the market that would allow Westwood Furniture…