Four different machines were under consideration for materials flow improvement on a drug bottling line. An engineer performed the economic analysis to select the best machine, but some of his calculations were removed from the report by a disgruntled employee. All machines are assumed to have a 10-year life. (a) Fill in the missing values in the comparison table. (b) Select the best machine at MARR = 18% per year, provided one must be chosen. Machine 1 2 3 Initial cost, $ ? -60,000 -72,000 -98,000 Annual cost, $ per year Annual savings, $ -70,000 -64,000 -61,000 -58,000 +80,000 +80,000 +80,000 +82,000 per year Overall ROR, i*, % 18.6% ? 23.1% 20.8% Machines compared 2 vs. 1 3 vs. 2 4 vs. 3 Incremental investment, $ - 16,000 -26,000 Incremental cash flow, $ per year +6,000 +3,000 ?

Four different machines were under consideration for materials flow improvement on a drug bottling line. An engineer performed the economic analysis to select the best machine, but some of his calculations were removed from the report by a disgruntled employee. All machines are assumed to have a 10-year life. (a) Fill in the missing values in the comparison table. (b) Select the best machine at MARR = 18% per year, provided one must be chosen. Machine 1 2 3 Initial cost, $ ? -60,000 -72,000 -98,000 Annual cost, $ per year Annual savings, $ -70,000 -64,000 -61,000 -58,000 +80,000 +80,000 +80,000 +82,000 per year Overall ROR, i*, % 18.6% ? 23.1% 20.8% Machines compared 2 vs. 1 3 vs. 2 4 vs. 3 Incremental investment, $ - 16,000 -26,000 Incremental cash flow, $ per year +6,000 +3,000 ?

Excel Applications for Accounting Principles

4th Edition

ISBN:9781111581565

Author:Gaylord N. Smith

Publisher:Gaylord N. Smith

Chapter26: Capital Budgeting (capbud)

Section: Chapter Questions

Problem 5R

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Jonfran Company manufactures three different models of paper shredders including the waste container, which serves as the base. While the shredder heads are different for all three models, the waste container is the same. The number of waste containers that Jonfran will need during the following years is estimated as follows: The equipment used to manufacture the waste container must be replaced because it is broken and cannot be repaired. The new equipment would have a purchase price of 945,000 with terms of 2/10, n/30; the companys policy is to take all purchase discounts. The freight on the equipment would be 11,000, and installation costs would total 22,900. The equipment would be purchased in December 20x4 and placed into service on January 1, 20x5. It would have a five-year economic life and would be treated as three-year property under MACRS. This equipment is expected to have a salvage value of 12,000 at the end of its economic life in 20x9. The new equipment would be more efficient than the old equipment, resulting in a 25 percent reduction in both direct materials and variable overhead. The savings in direct materials would result in an additional one-time decrease in working capital requirements of 2,500, resulting from a reduction in direct material inventories. This working capital reduction would be recognized at the time of equipment acquisition. The old equipment is fully depreciated and is not included in the fixed overhead. The old equipment from the plant can be sold for a salvage amount of 1,500. Rather than replace the equipment, one of Jonfrans production managers has suggested that the waste containers be purchased. One supplier has quoted a price of 27 per container. This price is 8 less than Jonfrans current manufacturing cost, which is as follows: Jonfran uses a plantwide fixed overhead rate in its operations. If the waste containers are purchased outside, the salary and benefits of one supervisor, included in fixed overhead at 45,000, would be eliminated. There would be no other changes in the other cash and noncash items included in fixed overhead except depreciation on the new equipment. Jonfran is subject to a 40 percent tax rate. Management assumes that all cash flows occur at the end of the year and uses a 12 percent after-tax discount rate. Required: 1. Prepare a schedule of cash flows for the make alternative. Calculate the NPV of the make alternative. 2. Prepare a schedule of cash flows for the buy alternative. Calculate the NPV of the buy alternative. 3. Which should Jonfran domake or buy the containers? What qualitative factors should be considered? (CMA adapted)
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Four different machines are under consideration for improving material flow in a production process. An engineer performed an economic analysis to select the best machine, but some of his calculations were deleted from the report by a disgruntled employee. All machines are assumed to have a 10-year life. (a) Fill in the missing numbers in the report. (b) Which machine should the company select if its MARR is 18% per year and one of the machines must be selected?
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