Required: 1. What is the net present value of the cash flows associated with the purchase alternative?
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The Riteway Ad Agency provides cars for its sales staff. In the past, the company has always purchased its cars from a dealer and then sold the cars after three years of use. The company’s present fleet of cars is three years old and will be sold very shortly. To provide a replacement fleet, the company is considering two alternatives:
| Purchase alternative: | The company can purchase the cars, as in the past, and sell the cars after three years of use. Ten cars will be needed, which can be purchased at a discounted price of $30,000 each. If this alternative is accepted, the following costs will be incurred on the fleet as a whole: |
|---|
| Annual cost of servicing, taxes, and licensing | $ 4,600 |
|---|---|
| Repairs, first year | $ 2,500 |
| Repairs, second year | $ 5,000 |
| Repairs, third year | $ 7,000 |
At the end of three years, the fleet could be sold for one-half of the original purchase price.
| Lease alternative: | The company can lease the cars under a three-year lease contract. The lease cost would be $65,000 per year (the first payment due at the end of Year 1). As part of this lease cost, the owner would provide all servicing and repairs, license the cars, and pay all the taxes. Riteway would be required to make a $12,500 security deposit at the beginning of the lease period, which would be refunded when the cars were returned to the owner at the end of the lease contract. |
|---|
Riteway Ad Agency’s required
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. What is the
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- Oberweis Dairy switched from delivery trucks with regular gasoline engines to ones with diesel engines. The diesel trucks cost $6,000 more than the ordinary gasoline trucks but costs $1,800 per year less to operate. Assume that Oberweis saves the operating costs at the end of each month. If Oberweis uses a discount rate of 1% per month, approximately how many months, at a minimum, must the diesel trucks remain in service for the switch to be sensible?Bienestar, Inc., has two plants that manufacture a line of wheelchairs. One is located in Kansas City, and the other in Tulsa. Each plant is set up as a profit center. During the past year, both plants sold their tilt wheelchair model for 1,620. Sales volume averages 20,000 units per year in each plant. Recently, the Kansas City plant reduced the price of the tilt model to 1,440. Discussion with the Kansas City manager revealed that the price reduction was possible because the plant had reduced its manufacturing and selling costs by reducing what was called non-value-added costs. The Kansas City manufacturing and selling costs for the tilt model were 1,260 per unit. The Kansas City manager offered to loan the Tulsa plant his cost accounting manager to help it achieve similar results. The Tulsa plant manager readily agreed, knowing that his plant must keep pacenot only with the Kansas City plant but also with competitors. A local competitor had also reduced its price on a similar model, and Tulsas marketing manager had indicated that the price must be matched or sales would drop dramatically. In fact, the marketing manager suggested that if the price were dropped to 1,404 by the end of the year, the plant could expand its share of the market by 20 percent. The plant manager agreed but insisted that the current profit per unit must be maintained. He also wants to know if the plant can at least match the 1,260 per-unit cost of the Kansas City plant and if the plant can achieve the cost reduction using the approach of the Kansas City plant. The plant controller and the Kansas City cost accounting manager have assembled the following data for the most recent year. The actual cost of inputs, their value-added (ideal) quantity levels, and the actual quantity levels are provided (for production of 20,000 units). Assume there is no difference between actual prices of activity units and standard prices. Required: 1. Calculate the target cost for expanding the Tulsa plants market share by 20 percent, assuming that the per-unit profitability is maintained as requested by the plant manager. 2. Calculate the non-value-added cost per unit. Assuming that non-value-added costs can be reduced to zero, can the Tulsa plant match the Kansas City per-unit cost? Can the target cost for expanding market share be achieved? What actions would you take if you were the plant manager? 3. Describe the role that benchmarking played in the effort of the Tulsa plant to protect and improve its competitive position.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.
- Able Transport operates a tour bus that they lease with terms that involve a fixed fee each month plus a charge for each mile driven. Able Transport drove the bus 7,000 miles and paid a total of $1,360 in June. In October. Able Transport paid $1,280 for the 5,000 miles driven. If Able Transport uses the high-low method to analyze costs, how much would Able Transport pay in December, if they drove 6,000 miles?The Riteway Ad Agency provides cars for its sales staff. In the past, the company has always purchased its cars from a dealer and then sold the cars after three years of use. The company’s present fleet of cars is three years old and will be sold very shortly. To provide a replacement fleet, the company is considering two alternatives: Purchase alternative: The company can purchase the cars, as in the past, and sell the cars after three years of use. Ten cars will be needed, which can be purchased at a discounted price of $16,000 each. If this alternative is accepted, the following costs will be incurred on the fleet as a whole: Annual cost of servicing, taxes, and licensing $ 4,900 Repairs, first year $ 2,800 Repairs, second year $ 5,300 Repairs, third year $ 7,300 At the end of three years, the fleet could be sold for one-half of the original purchase price. Lease alternative: The company can lease the cars under a three-year lease contract.…The Riteway Ad Agency provides cars for its sales staff. In the past, the company has always purchased its cars from a dealer and then sold the cars after three years of use. The company’s present fleet of cars is three years old and will be sold very shortly. To provide a replacement fleet, the company is considering two alternatives: Purchase alternative: The company can purchase the cars, as in the past, and sell the cars after three years of use. Ten cars will be needed, which can be purchased at a discounted price of $20,000 each. If this alternative is accepted, the following costs will be incurred on the fleet as a whole: Annual cost of servicing, taxes, and licensing $ 5,300 Repairs, first year $ 3,200 Repairs, second year $ 5,700 Repairs, third year $ 7,700 At the end of three years, the fleet could be sold for one-half of the original purchase price. Lease alternative: The company can lease the cars under a three-year lease contract.…
- The Riteway Ad Agency provides cars for its sales staff. In the past, the company has always purchased its cars from a dealer and then sold the cars after three years of use. The company’s present fleet of cars is three years old and will be sold very shortly. To provide a replacement fleet, the company is considering two alternatives: Purchase alternative: The company can purchase the cars, as in the past, and sell the cars after three years of use. Ten cars will be needed, which can be purchased at a discounted price of $31,000 each. If this alternative is accepted, the following costs will be incurred on the fleet as a whole: Annual cost of servicing, taxes, and licensing $ 4,700 Repairs, first year $ 2,600 Repairs, second year $ 5,100 Repairs, third year $ 7,100 At the end of three years, the fleet could be sold for one-half of the original purchase price. Lease alternative: The company can lease the cars under a three-year lease contract. The lease cost…The Riteway Ad Agency provides cars for its sales staff. In the past, the company has always purchased its cars from a dealer and then sold the cars after three years of use. The company’s present fleet of cars is three years old and will be sold very shortly. To provide a replacement fleet, the company is considering two alternatives: Purchase alternative: The company can purchase the cars, as in the past, and sell the cars after three years of use. Ten cars will be needed, which can be purchased at a discounted price of $25,000 each. If this alternative is accepted, the following costs will be incurred on the fleet as a whole: Annual cost of servicing, taxes, and licensing $ 4,100 Repairs, first year $ 2,000 Repairs, second year $ 4,500 Repairs, third year $ 6,500 At the end of three years, the fleet could be sold for one-half of the original purchase price. Lease alternative: The company can lease the cars under a three-year lease contract.…The Riteway Ad Agency provides cars for its sales staff. In the past, the company has always purchased its cars from a dealer and then sold the cars after three years of use. The company’s present fleet of cars is three years old and will be sold very shortly. To provide a replacement fleet, the company is considering two alternatives: Purchase alternative: The company can purchase the cars, as in the past, and sell the cars after three years of use. Ten cars will be needed, which can be purchased at a discounted price of $23,000 each. If this alternative is accepted, the following costs will be incurred on the fleet as a whole: Annual cost of servicing, taxes, and licensing $ 3,900 Repairs, first year $ 1,800 Repairs, second year $ 4,300 Repairs, third year $ 6,300 At the end of three years, the fleet could be sold for one-half of the original purchase price. Lease alternative: The company can lease the cars under a three-year lease contract. The lease…
- The Riteway Ad Agency provides cars for its sales staff. In the past, the company has always purchasedits cars from a dealer and then sold the cars after three years of use. The company’s present fleet of cars isthree years old and will be sold very shortly. To provide a replacement fleet, the company is consideringtwo alternatives:Purchase alternative: The company can purchase the cars, as in the past, and sell the cars after threeyears of use. Ten cars will be needed, which can be purchased at a discounted price of $17,000each. If this alternative is accepted, the following costs will be incurred on the fleet as a whole:Annual cost of servicing, taxes,and licensing ........................................... $3,000Repairs, first year ....................................... $1,500Repairs, second year .................................. $4,000Repairs, third year ...................................... $6,000At the end of three years, the fleet could be sold for one-half of the original…Jake’s Shipping, Inc. needs to purchase a new fleet of light trucks for its shipping business. The firm is trying to decide whether to purchase trucks with diesel engines or trucks with gasoline engines. The diesel truck will have a useful life of 12 years, after which it will need to be replaced. The diesel truck costs $110,000 to purchase and its annual maintenance and operation costs will depend on the cost of regular maintenance/repairs and the cost of diesel fuel. In Years 1 through 5, its annual maintenance/repair costs are expected to be $2000 per year. In Years 6 through 12, its annual maintenance/repair costs are expected to be $2500 per year. The firm expects that the diesel truck will use 5,900 gallons of diesel fuel per year (Years 1 through 12) and believes that diesel fuel will cost $2.65 per gallon, on average, during the life of the truck. The gasoline truck only costs $60,000 to purchase but will have a useful life of only 4 years, after which it will need to be…Home Builder Supply, a retailer in the home improvement industry, currently operates seven retail outlets in Georgia and South Carolina. Management is contemplating building an eighth retail store across town from its most successful retail outlet. The company already owns the land for this store, which currently has an abandoned warehouse located on it. Last month, the marketing department spent $10,000 on market research to determine the extent of customer demand for the new store. Now Home Builder Supply must decide whether to build and open the new store. Which of the following should be included as part of the incremental earnings for the proposed new retail store?
