All equipment costs will continue to be depreciated on a straight-line basis. For simplicity, ignore income taxes and the time value of money. Q.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 TechGuide (i) upgrade the equipment or (ii) replace the equipment? The TechGuide Company producesand sells 7,500 modular computer desks per year at a selling price of $750 each. Its current productionequipment, purchased for $1,800,000 and with a five-year useful life, is only two years old. It has a terminaldisposal value of $0 and is depreciated on a straight-line basis. The equipment has a current disposal priceof $450,000. However, the emergence of a new molding technology has led TechGuide to consider either up-grading or replacing the production equipment. The following table presents data for the two alternatives:HomeInsertPage LayoutFormulasDataReviewUpgrade$3,000,000Replace$4,800,0002 One-time equipment costs3 Variable manufacturing cost per desk4 Remaining useful life of equipment (in years)5 Terminal disposal value of equipment15075332424

Answered: The TechGuide Company produces and…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 9P

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All equipment costs will continue to be depreciated on a straight-line basis. For simplicity, ignore income taxes and the time value of money.

Q.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 TechGuide (i) upgrade the equipment or (ii) replace the equipment?

The TechGuide Company produces
and sells 7,500 modular computer desks per year at a selling price of $750 each. Its current production
equipment, purchased for $1,800,000 and with a five-year useful life, is only two years old. It has a terminal
disposal value of $0 and is depreciated on a straight-line basis. The equipment has a current disposal price
of $450,000. However, the emergence of a new molding technology has led TechGuide to consider either up-
grading or replacing the production equipment. The following table presents data for the two alternatives:
Home
Insert
Page Layout
Formulas
Data
Review
Upgrade
$3,000,000
Replace
$4,800,000
2 One-time equipment costs
3 Variable manufacturing cost per desk
4 Remaining useful life of equipment (in years)
5 Terminal disposal value of equipment
150
75
3
3
24
24

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