MANAGERIAL ACCOUNTING FOR MANAGERS
MANAGERIAL ACCOUNTING FOR MANAGERS
5th Edition
ISBN: 9781264196456
Author: Noreen
Publisher: MCG
Question
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Chapter 7, Problem 7.30P

1

To determine

Introduction: The variability between present value of all cash outflow and present value of all cash inflow is known as net present value (NPV). The discount rate at which the net present value is equal to zero is knows as Internal rate of return (IRR). The ratio of income and capital gain is known as simple rate of return.

To compute: The net annual cost saving.

1

Expert Solution
Check Mark

Answer to Problem 7.30P

The annual net cost saving if the robot is purchased is $580,000.

Explanation of Solution

Annual saving inventory carrying costs $210,000

Saving in labor cost is 25000 direct labor hour each year the labor rate is $16 per hour

    ParticularAmount
    Saving in labor costs 400,000
    Saving in inventory carrying cost210,000
    Total 610,000
    Less: increase in power and maintenance costs 30,000
    Annual net cost saving 580,000

The annual net cost saving if the robot is purchased is $580,000.

2.

To determine

Introduction: The variability between present value of all cash outflow and present value of all cash inflow is known as net present value (NPV). The discount rate at which the net present value is equal to zero is knows as Internal rate of return (IRR). The ratio of income and capital gain is known as simple rate of return.

To compute: The net present value of the proposed investment in the robot is $46,120.

2.

Expert Solution
Check Mark

Answer to Problem 7.30P

The net present value of the proposed investment in the robot is $46,120.

Explanation of Solution

Explanation:

    ParticularNew $YearYear
    Cost of robot (1600000)
    Installation and software450000
    Cash released from inventory400000
    Annual net cost saving 580000
    Salvage value 70000
    Cash flows(2050000)40000058000070000
    Discount 10.8332.9910.402
    Present value of cash (2050000)333200173478028140
    Net present value 46120

The net present value of the proposed investment in the robot is $46,120.

3.

To determine

Introduction: The variability between present value of all cash outflow and present value of all cash inflow is known as net present value (NPV). The discount rate at which the net present value is equal to zero is knows as Internal rate of return (IRR). The ratio of income and capital gain is known as simple rate of return.

To compute: The actual net present value of the investment.

3.

Expert Solution
Check Mark

Answer to Problem 7.30P

The actual net present value is (148520)

Explanation of Solution

    Particular Amount $
    Saving in labor cost (22500 hours×$16perhour)360000
    Saving inventory carrying costs210000
    Total 570000
    Less: increase in power and maintenance 30000
    Annual net cost saving 540000

Calculation of NPV.

    ParticularNew $YearYear
    Cost of robot (1600000)
    Installation and software(524000)
    Cash released from inventory400000
    Annual net cost saving 540000
    Salvage value 70000
    Cash flows(2125000)40000054000070000
    Discount 10.8332.9910.402
    Present value of cash (2125000)333200161514028140
    Net present value (148520)

The actual net present value is (148520)

4

To determine

Introduction: The variability between present value of all cash outflow and present value of all cash inflow is known as net present value (NPV). The discount rate at which the net present value is equal to zero is knows as Internal rate of return (IRR). The ratio of income and capital gain is known as simple rate of return.

The benefit other than cost benefits and compute amount of annual cash inflow that would be needed from the benefit.

4

Expert Solution
Check Mark

Answer to Problem 7.30P

The new automated machine gives intangible benefits such as speed reliability and high quality, more variety of products, reduction in inventories etc. Rate of return worth at least $49,646 per year.

Explanation of Solution

  1. The new automated machine gives intangible benefits such as speed reliability and high quality, more variety of products, reduction in inventories etc.
  2. These intangible benefits will result in saving costs from the reduced labor hours.

  3. Net present value excluding intangible benefits (negative)- ($148,520)
  4. Present value actor for annuity at 20% for 5 periods − 2.991

  =Negativenetpresentvaluetobeoffsetpresentvaluefactorforannuity=$148,5202.991=$49,656

Rate of return worth at least $49,646 per year.

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