Airodyne Wind, Inc., has wind tunnels that can operate vertically or horizontally for evaluating the effects of airflow on a component's PCB response and reliability. The company expects to build a new tunnel that will beoutfitted with multiple sensor ports. For the estimates below, calculate the equivalent annual cost of theproject.First CostReplacement Cost, Year 2AOC per YearSalvage ValueLife, YearsInterest RateThe equivalent annual cost of the project is $$-570,000$-300,000$-870,000$270,000713%

First Cost (C) = $ -570000Replacement Cost,(R) Year 2 (n1) = $…

Answered: Airodyne Wind, Inc., has wind tunnels…

Financial And Managerial Accounting

15th Edition

ISBN:9781337902663

Author:WARREN, Carl S.

Publisher:WARREN, Carl S.

Chapter26: Capital Investment Analysis

Section: Chapter Questions

Problem 5MAD: Home Garden Inc. is considering the construction of a distribution warehouse in West Virginia to...

See similar textbooks

Similar questions

Mallette Manufacturing, Inc., produces washing machines, dryers, and dishwashers. Because of increasing competition, Mallette is considering investing in an automated manufacturing system. Since competition is most keen for dishwashers, the production process for this line has been selected for initial evaluation. The automated system for the dishwasher line would replace an existing system (purchased one year ago for 6 million). Although the existing system will be fully depreciated in nine years, it is expected to last another 10 years. The automated system would also have a useful life of 10 years. The existing system is capable of producing 100,000 dishwashers per year. Sales and production data using the existing system are provided by the Accounting Department: All cash expenses with the exception of depreciation, which is 6 per unit. The existing equipment is being depreciated using straight-line with no salvage value considered. The automated system will cost 34 million to purchase, plus an estimated 20 million in software and implementation. (Assume that all investment outlays occur at the beginning of the first year.) If the automated equipment is purchased, the old equipment can be sold for 3 million. The automated system will require fewer parts for production and will produce with less waste. Because of this, the direct material cost per unit will be reduced by 25 percent. Automation will also require fewer support activities, and as a consequence, volume-related overhead will be reduced by 4 per unit and direct fixed overhead (other than depreciation) by 17 per unit. Direct labor is reduced by 60 percent. Assume, for simplicity, that the new investment will be depreciated on a pure straight-line basis for tax purposes with no salvage value. Ignore the half-life convention. The firms cost of capital is 12 percent, but management chooses to use 20 percent as the required rate of return for evaluation of investments. The combined federal and state tax rate is 40 percent. Required: 1. Compute the net present value for the old system and the automated system. Which system would the company choose? 2. Repeat the net present value analysis of Requirement 1, using 12 percent as the discount rate. 3. Upon seeing the projected sales for the old system, the marketing manager commented: Sales of 100,000 units per year cannot be maintained in the current competitive environment for more than one year unless we buy the automated system. The automated system will allow us to compete on the basis of quality and lead time. If we keep the old system, our sales will drop by 10,000 units per year. Repeat the net present value analysis, using this new information and a 12 percent discount rate. 4. An industrial engineer for Mallette noticed that salvage value for the automated equipment had not been included in the analysis. He estimated that the equipment could be sold for 4 million at the end of 10 years. He also estimated that the equipment of the old system would have no salvage value at the end of 10 years. Repeat the net present value analysis using this information, the information in Requirement 3, and a 12 percent discount rate. 5. Given the outcomes of the previous four requirements, comment on the importance of providing accurate inputs for assessing investments in automated manufacturing systems.
Hudson Corporation is considering three options for managing its data warehouse: continuing with its own staff, hiring an outside vendor to do the managing, or using a combination of its own staff and an outside vendor. The cost of the operation depends on future demand. The annual cost of each option (in thousands of dollars) depends on demand as follows: If the demand probabilities are 0.2, 0.5, and 0.3, which decision alternative will minimize the expected cost of the data warehouse? What is the expected annual cost associated with that recommendation? Construct a risk profile for the optimal decision in part (a). What is the probability of the cost exceeding $700,000?
Home Garden Inc. is considering the construction of a distribution warehouse in West Virginia to service its east coast stores based on the following estimates: a. Determine the net present value of building the warehouse, assuming a construction cost of 20,000,000, an annual net cost savings of 4,000,000, and a desired rate of return of 14%. Use the present value tables provided in Appendix A. b. Determine the net present value of building the warehouse, assuming a construction cost of 25,000,000, an annual net cost savings of 2,500,000, and a desired rate of return of 14%. Use the present value tables provided in Appendix A. c. Interpret the results of parts (a) and (b).
Lander Parts, Inc., produces various automobile parts. In one plant, Lander has a manufacturing cell with the theoretical capability to produce 450,000 fuel pumps per quarter. The conversion cost per quarter is 9,000,000. There are 150,000 production hours available within the cell per quarter. Required: 1. Compute the theoretical velocity (per hour) and the theoretical cycle time (minutes per unit produced). 2. Compute the ideal amount of conversion cost that will be assigned per subassembly. 3. Suppose the actual time required to produce a fuel pump is 40 minutes. Compute the amount of conversion cost actually assigned to each unit produced. What happens to product cost if the time to produce a unit is decreased to 25 minutes? How can a firm encourage managers to reduce cycle time? Finally, discuss how this approach to assigning conversion cost can improve delivery time. 4. Assuming the actual time to produce one fuel pump is 40 minutes, calculate MCE. How much non-value-added time is being used? How much is it costing per unit? 5. Cycle time, velocity, MCE, conversion cost per unit (theoretical conversion rate actual conversion time), and non-value-added costs are all measures of performance for the cell process. Discuss the incentives provided by these measures.
The Siler Construction Company is about to bid on a new industrial construction project. To formulate their bid, the company needs to estimate the time required for the project. Based on past experience, management expects that the project will require at least 24 months, and could take as long as 48 months if there are complications. The most likely scenario is that the project will require 30 months. a. Assume that the actual time for the project can be approximated using a triangular probability distribution. What is the probability that the project will take less than 30 months? b. What is the probability that the project will take between 28 and 32 months? c. To submit a competitive bid, the company believes that if the project takes more than 36 months, then the company will lose money on the project. Management does not want to bid on the project if there is greater than a 25% chance that they will lose money on this project. Should the company bid on this project?
Jensen Tire Auto is deciding whether to purchase a maintenance contract for its new computer wheel alignment and balancing machine. Managers feel that maintenance expense should be related to usage, and they collected the following information on weekly usage (hours) and annual maintenance expense (in hundreds of dollars). a. Develop a scatter chart with weekly usage hours as the independent variable. What does the scatter chart indicate about the relationship between weekly usage and annual maintenance expense? b. Use the data to develop an estimated regression equation that could be used to predict the annual maintenance expense for a given number of hours of weekly usage. What is the estimated regression model? c. Test whether each of the regression parameters 0 and 1 is equal to zero at a 0.05 level of significance. What are the correct interpretations of the estimated regression parameters? Are these interpretations reasonable? d. How much of the variation in the sample values of annual maintenance expense does the model you estimated in part (b) explain? e. If the maintenance contract costs 3,000 per year, would you recommend purchasing it? Why or why not?
Caduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
A mechanical engineer is considering two types of pressure sensors for the low-pressure steam lines in several of the company plants. Piezoresistive sensors use the change in conductivity of semiconductors to measure the pressure. Fiber optic sensors use the properties of fiber optic interferometers to sense nanometer scale displacement of membranes. The costs for each system are shown below. Which should be selected based on a present worth comparison at an interest rate of 1% per month?
Falk Corporation is considering two types of manufacturing systems to produce its shaft couplings over six years: (1) a cellular manufacturing system (CMS) and (2) a flexible manufacturing system (FMS). The average number of pieces to be produced on either system would be 544,000 per year. Operating costs, initial investment, and salvage value for each alternative are estimated as follows: The firm's MARR is 15%. Which alternative would be a better choice based on the IRR criterion?
Two mutually exclusive alternatives for office building refrigeration and air conditioning are being investigated. Their relevant costs and lives are summarized as follows: If the hurdle rate (MARR) is 15% per year and thestudy period is 18 years, which chilling system should be recommended?
Old Southwest Canning Co. has determined that any one of four machines can be used in a certain phase of its chili-canning operation. The first costsand annual operating costs (AOC) are estimated below, and all machines have a 5-year life. The MARR is 25% per year. (a) Determine which machine should be selected on the basis of a rate of return analysis. (b) Use a spreadsheet to perform PW analysis of each machine. Compare the machine selections with that of the ROR analysis.

SEE MORE QUESTIONS

Recommended textbooks for you

Financial And Managerial Accounting

Accounting

ISBN:

9781337902663

Author:

WARREN, Carl S.

Publisher:

Cengage Learning,

Managerial Accounting

Accounting

ISBN:

9781337912020

Author:

Carl Warren, Ph.d. Cma William B. Tayler

Publisher:

South-Western College Pub

Essentials of Business Analytics (MindTap Course …

Statistics

ISBN:

9781305627734

Author:

Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:

Cengage Learning

Financial And Managerial Accounting

Accounting

ISBN:

9781337902663

Author:

WARREN, Carl S.

Publisher:

Cengage Learning,

Managerial Accounting

Accounting

ISBN:

9781337912020

Author:

Carl Warren, Ph.d. Cma William B. Tayler

Publisher:

South-Western College Pub

Essentials of Business Analytics (MindTap Course …

Statistics

ISBN:

9781305627734

Author:

Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:

Cengage Learning

Principles of Accounting Volume 2

Accounting

ISBN:

9781947172609

Author:

OpenStax

Publisher:

OpenStax College

Excel Applications for Accounting Principles

Accounting

ISBN:

9781111581565

Author:

Gaylord N. Smith

Publisher:

Cengage Learning

Cornerstones of Cost Management (Cornerstones Ser…

Accounting

ISBN:

9781305970663

Author:

Don R. Hansen, Maryanne M. Mowen

Publisher:

Cengage Learning

SEE MORE TEXTBOOKS