To analysis:
Whether to purchase the automated welding machine or not.
Answer to Problem 20P
Solution:
No, it is not advisable to purchase the automated welding machine.
Explanation of Solution
On the basis of
The net present value of the automated machine will be calculated as under −
The present value of
Given,
- Cost of machine = $ 250,000
- Software and installation = $ 80,000
- Salvage value of old machine = $ 12,000
- Replacement parts cost in year 3 = $ 45,000
Total Present value of cash out flows | ||
Cost of machine | 250,000 | |
Software and installation | 80,000 | |
Less: Salvage value of old machine | -12,000 | |
Present value of replacement of parts | ||
Replacement parts cost | 45,000 | |
PVIF @ 16 % for 4 year | 0.552 | 24,840 |
Total Present value of cash out flows | 342,840 |
The total present value of cash outflows = $ 342,840.
Now, the present value of cash inflows will be calculated as −
Given,
- Annual net savings from year 1 to 6 = $ 78,500
- Salvage value of new machine at the year of year 6 = $ 20,000
Total present value of Cash Inflows | |||
Year | PVIF @ 16 % (2) | Present value of | |
1 to 6 | Annual net savings = $ 78,500 | 3.685 | 289,272.50 |
6 | Salvage value = $ 20,000 | 0.410 | 8,200 |
Total present value of Cash Inflows | 297,472.50 |
The present value of cash inflows = $ 297,472.50.
Now, the net present value of automated welding machine will be calculated as under −
Given,
The net present value is = - $ 45,367.50 i.e., negative, so it is not advisable to purchase the automated welding machine.
Note: PVIF values are taken from the charts provided.
Thus, it is not advisable to purchase the automated welding machine.
Requirement 3
To compute:
Minimum dollar value per year to make the new welding machine as acceptable investment.
Answer to Problem 20P
Solution:
Minimum dollar value per year to make the new welding machine as acceptable investment = $ 12,311.40
Explanation of Solution
The minimum dollar value per year to make new welding machine as acceptable investment will be calculated as under −
Given,
- Net present Value of welding machine = - $ 45,367.50
- PVAF @ 16 % for 6 years = $ 3.6853
The machine should provide at least a benefit of $ 12,311.40 per year to make it acceptable.
Thus, the minimum dollar value per year to make the new welding machine as acceptable investment has been calculated.
Want to see more full solutions like this?
Chapter 12 Solutions
INTRO TO MANAGERIAL ACCT-CONNECT ACCESS
- Toyland Products is considering producing toy action figures and sandbox toys. The products require different specialized machines, each costing $1 million. Each machine has a five-year life and zero residual value. The two products have different patterns of predicted net cash inflows. (Click the icon to view the data.) Calculate the toy action figure project's ARR. If the toy action figure project had a residual value of $175,000, would the ARR change? Explain and recalculate if necessary. Does this investment pass Toyland's ARR screening rule? First, enter the formula, then compute the ARR of the toy action figure project. (Enter amounts in dollars, not millions. Enter your answer as a percent rounded to two decimal places.) Accounting Average annual operating income from asset Initial investment rate of return %arrow_forwardFriedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.arrow_forwardHemmingway, Inc. is considering a $5 million research and development (R&D) project. Profit projections appear promising, but Hemmingway’s president is concerned because the probability that the R&D project will be successful is only 0.50. Furthermore, the president knows that even if the project is successful, it will require that the company build a new production facility at a cost of $20 million in order to manufacture the product. If the facility is built, uncertainty remains about the demand and thus uncertainty about the profit that will be realized. Another option is that if the R&D project is successful, the company could sell the rights to the product for an estimated $25 million. Under this option, the company would not build the $20 million production facility. The decision tree follows. The profit projection for each outcome is shown at the end of the branches. For example, the revenue projection for the high demand outcome is $59 million. However, the cost of the R&D project ($5 million) and the cost of the production facility ($20 million) show the profit of this outcome to be $59 – $5 – $20 = $34 million. Branch probabilities are also shown for the chance events. Analyze the decision tree to determine whether the company should undertake the R&D project. If it does, and if the R&D project is successful, what should the company do? What is the expected value of your strategy? What must the selling price be for the company to consider selling the rights to the product? Develop a risk profile for the optimal strategy.arrow_forward
- Although the Chen Company’s milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $110,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $19,000 per year. It would have zero salvage value at the end of its life. The project cost of capital is 10%, and its marginal tax rate is 25%. Should Chen buy the new machine?arrow_forwardGina 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?arrow_forwardA mini-mart needs a new freezer and the initial Investment will cost $300,000. Incremental revenues, including cost savings, are $200,000, and incremental expenses, including depreciation, are $125,000. There is no salvage value. What is the accounting rate of return (ARR)?arrow_forward
- Toy Time Products is considering producing toy action figures and sandbox toys. The products require different specialized machines, each costing $1 million. Each machine has a five-year life and zero residual value. The two products have different patterns of predicted net cash inflows. (Click the icon to view the data.) Calculate the sandbox toy project's ARR. If the sandbox toy project had a residual value of $225,000, would the ARR change? Explain and recalculate if necessary. Does this investment pass Toy Time's ARR screening rule? First, enter the formula, then compute the ARR of the sandbox toy project. (Enter amounts in dollars, not millions. Enter your answer as a percent rounded to two decimal places.) Accounting = rate of return Get more help. ÷ Data table Annual Net Cash Inflows Toy action figure Sandbox toy project project Year Year 1. Year 2. Year 3. Year 4. Year 5.. Total Toy Time will consider making capital investments only if the payback period of the project is less…arrow_forwardYou are the financial analyst for furniture manufacturer. The company is considering using a certain new raw material in its furniture. The company has estimated the information in the following table about the market for a chair with the new material. The company expects to sell the chair for six years. The equipment required for the project has no salvage value. The required return for projects of this type is 13 percent, and the company has a 40 percent tax rate. Pessimistic Expected Optimistic Market size 130,000 150,000 165,000 Market share 21% 25% 28% Selling price $140 $145 $150 Variable costs per unit $102 $98 $94 Fixed costs per year $1,015,000 $950,000 $900,000 Initial investment $2,200,000 $2,100,000 $2,000,000 Required: Should you recommend the project?arrow_forwardSuppose we are thinking about replacing an old computer with a new one. The old one cost us $1.4 million; the new one will cost $1.7 million. The new machine will be depreciated straight-line to zero over its five-year life. It will probably be worth about $325,000 after five years. The old computer is being depreciated at a rate of $281,000 per year. It will be completely written off in three years. If we don't replace it now, we will have to replace it in two years. We can sell it now for $450,000; in two years, it will probably be worth $130,000. The new machine will save us $315,000 per year in operating costs. The tax rate is 22 percent, and the discount rate is 12 percent. a-1. Calculate the EAC for the old and the new computer. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) a-2. What is the NPV of the decision to replace the computer now? (A negative answer should be…arrow_forward
- large automobile manufacturer is considering the installation of a high-tech material handling system for $30,000,000. This system will save $7,500,000 per year in manual labor, and it will incur $2,750,000 in annual operating and maintenance expenditures. The salvage value at the end of the system's 10-year life is negligible. If the company's hurdle rate (MARR) is 10% per year. How can I find the Internal Rate of Returnarrow_forwardThe Tool Box needs to purchase a new machine costing $1.46 million. Management is estimating the machine will generate cash inflows of $223,000 the first year and $600,000 for the following three years. If management requires a minimum 14 percent rate of return, should the firm purchase this particular machine? Why or why not? The answer cannot be determined as there are multiple IRRs No, because the IRR is 10.75 percent No, because the IRR is 12.74 percent Yes, because the IRR is 12.74 percent Yes, because the IRR is 10.75 percentarrow_forwardWe believe we can sell 90,000 home security devices per year at $150 per piece. They cost $130 to manufacture (variable cost). Fixed production costs run $215,000 per year. The necessary equipment costs $785,000 to buy and would be depreciated at a 25% CCA rate. The equipment would have a zero salvage value after the five-year life of the project. We need to invest $140,000 in net working capital up front; no additional net working capital investment is necessary. The discount rate is 19%, and the tax rate is 35%. What is the NPV of the project? (Do not round your intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) NPVarrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningEssentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College