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AccountingManagerial Accounting: The Cornerstone of Business Decision-Making7th Edition

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Chapter 12, Problem 46P
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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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Problem 6DQ
Problem 7DQ
Problem 8DQ
Problem 9DQ
Problem 10DQ
Problem 11DQ
Problem 12DQ
Problem 13DQ
Problem 14DQ
Problem 15DQ
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Problem 3MCQ
Problem 4MCQ
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Problem 7MCQ
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Problem 20MCQ
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Problem 26BEB
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Problem 29BEB
Problem 30BEB
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Problem 33E
Problem 34E
Problem 35E
Problem 36E
Problem 37E
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Problem 39E
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Problem 41P
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Problem 44P
Problem 45P
Problem 46P
Problem 47P
Problem 48P
Problem 49P
Problem 50P
Problem 51P
Problem 52P
Problem 53P
Problem 54C
Problem 55C
Problem 1MTC
Problem 2MTC
Problem 3MTC
Problem 4MTC
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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
86 views

Net Present Value and Competing Alternatives

Stillwater Designs has been rebuilding Model 100, Model 120, and Model 150 Kicker sub-woofers that were returned for warranty action. Customers returning the subwoofers receive a new replacement. The warrant)' returns are then rebuilt and resold (as seconds). Tent sales are often used to sell the rebuilt speakers. As part of the rebuilding process, the speakers are demagnetized so that metal pieces and shavings can be removed. A demagnetizing (demag) machine is used to achieve this objective. A product design change has made the most recent Model 150 speakers too tall for the demag machine. They no longer fit in the demag machine.

Stillwater Designs is currently considering two alternatives. First, a new demag machine can be bought that has a different design, eliminating the fit problem. The cost of this machine is $600,000, and it will last 5 years. Second, Stillwater can keep the current machine and sell the 150 speakers for scrap, using the old demag machine for the Model 100 and 120 speakers only. A rebuilt speaker sells for $295 and costs $274.65 to rebuild (for materials, labor, and overhead cash outlays). The $274.65 outlay includes the annual operating cash effects of the new demag machine. If not rebuilt, the Model 150 speakers can be sold for $4 each as scrap. There are 10,000 Model 150 warranty returns per year. Assume that the required rate of return is 10%.

Required:

  1. 1. Determine which alternative is the best for Stillwater Designs by using NPV analysis.
  2. 2. CONCEPTUAL CONNECTION Determine which alternative is best for Stillwater Designs by using an IRR analysis. Explain why NPV analysis is a better approach.

1.

To determine

Identify the best alternative for SD using NPV analysis.

Explanation

Net Present Value:

The remaining balance of the present value of a project’s inflows and outflows is known as net present value (NPV). It is a discounting model of capital investment decision. A project with a positive NPV increases the wealth of a firm whereas a project with a negative NPV decreases the wealth of a firm.

Use the following formula to calculate NPV for rebuild alternative:

NPV=(Cash flow×Discount factor)−Investment

Substitute $203,5001 for cash flow, 3.79079 for discount factor and $600,000 for investment in the above formula.

NPV=($203,500×3.79079)−$600,000=$771,426−$600,000=$171,426

Therefore, NPV of rebuild alternative is $171,426.

Use the following formula to calculate NPV for scrap alternative:

NPV=(Cash flow×Discount factor)−Investment

Substitute $40,0002 for cash flow, 3.79079 for discount factor and $0 for investment in the above formula.

NPV=($40,000×3

2.

To determine

Identify the best alternative for SD using IRR analysis. Explain the reason of NPV being a better approach.

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Ch-12 P-1DQCh-12 P-2DQCh-12 P-3DQCh-12 P-4DQCh-12 P-5DQCh-12 P-6DQCh-12 P-7DQCh-12 P-8DQCh-12 P-9DQCh-12 P-10DQ
Ch-12 P-11DQCh-12 P-12DQCh-12 P-13DQCh-12 P-14DQCh-12 P-15DQCh-12 P-1MCQCh-12 P-2MCQCh-12 P-3MCQCh-12 P-4MCQCh-12 P-5MCQCh-12 P-6MCQCh-12 P-7MCQCh-12 P-8MCQCh-12 P-9MCQCh-12 P-10MCQCh-12 P-11MCQCh-12 P-12MCQCh-12 P-13MCQCh-12 P-14MCQCh-12 P-15MCQCh-12 P-16MCQCh-12 P-17MCQCh-12 P-18MCQCh-12 P-19MCQCh-12 P-20MCQCh-12 P-21BEACh-12 P-22BEACh-12 P-23BEACh-12 P-24BEACh-12 P-25BEACh-12 P-26BEBCh-12 P-27BEBCh-12 P-28BEBCh-12 P-29BEBCh-12 P-30BEBCh-12 P-31ECh-12 P-32ECh-12 P-33ECh-12 P-34ECh-12 P-35ECh-12 P-36ECh-12 P-37ECh-12 P-38ECh-12 P-39ECh-12 P-40ECh-12 P-41PCh-12 P-42PCh-12 P-43PCh-12 P-44PCh-12 P-45PCh-12 P-46PCh-12 P-47PCh-12 P-48PCh-12 P-49PCh-12 P-50PCh-12 P-51PCh-12 P-52PCh-12 P-53PCh-12 P-54CCh-12 P-55CCh-12 P-1MTCCh-12 P-2MTCCh-12 P-3MTCCh-12 P-4MTCCh-12 P-5MTC

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