Cari Pump (CP) Company is considering either upgrading or replacing its production equipment. The company produces and sells annually 7,000 pumps at a selling price of $850 each. The current production equipment, purchased for $1,850,000 and with a five-year useful life, is only two years old and is depreciated on a straight-line basis. Also, it has a terminal disposal value of $0 and a current disposal price of $500,000. The following table presents data for the two alternatives: A B C 1 Choice Upgrade Replace 2 One-time equipment costs $3,000,000 $4,800,000 3 Variable manufacturing cost per Pump $150 $70 4 Remaining useful life of equipment (years) 3 3 5 Terminal disposal value of equipment Required 0 0 Prepare a schedule, for the remaining 3 years, reflecting whether CP should upgrade its production line or replace it? Assume that the one-time equipment cost to replace the production equipment is negotiable and all other data are as given. What is the maximum one-time equipment cost that CP would be willing to pay to replace the old equipment rather than upgrade it? Assume that the capital expenditures to replace and upgrade the production equipment are as given in the original exercise, but that the production and sales quantity is not known. For what production and sales quantity would CP: Upgrade the equipment Replace the equipment? PART 2 Assume that all data are as given in the original exercise. Nick Koe is CP’s manager, and his bonus is based on operating Because he is likely to relocate after about a year, his current bonus is his primary concern. Which alternative would Nick choose? Explain.
Cari Pump (CP) Company is considering either upgrading or replacing its production equipment. The company produces and sells annually 7,000 pumps at a selling price of $850 each. The current production equipment, purchased for $1,850,000 and with a five-year useful life, is only two years old and is
The following table presents data for the two alternatives:
|
A |
B |
C |
|
1 Choice |
Upgrade |
Replace |
|
2 One-time equipment costs |
$3,000,000 |
$4,800,000 |
|
3 Variable |
$150 |
$70 |
|
4 Remaining useful life of equipment (years) |
3 |
3 |
|
5 Terminal disposal value of equipment
Required |
0 |
0 |
Prepare a schedule, for the remaining 3 years, reflecting whether CP should upgrade its production line or replace it?
Assume that the one-time equipment cost to replace the production equipment is negotiable and all other data are as given. What is the maximum one-time equipment cost that CP would be willing to pay to replace the old equipment rather than upgrade it?
Assume that the capital expenditures to replace and upgrade the production equipment are as given in the original exercise, but that the production and sales quantity is not known. For what production and sales quantity would CP:
- Upgrade the equipment
- Replace the equipment?
PART 2
Assume that all data are as given in the original exercise. Nick Koe is CP’s manager, and his bonus is based on operating Because he is likely to relocate after about a year, his current bonus is his primary concern. Which alternative would Nick choose? Explain.
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