Hillsong Inc. manufactures snowsuits. Hillsong is considering purchasing a new sewing machine at a cost of $2.45 million. Its existing machine was purchased five years ago at a price of $1.8 million; six months ago, Hillsong spent $55,000 to keep it operational. The existing sewing machine can be sold today for $246,049. The new sewing machine would require a one-time, $85,000 training cost. Operating costs would decrease by the following amounts for years 1 to 7: Year 1 2 3 4 5 6 7 $389,200 399,800 410,200 425,900 432,400 435,200 436,800 The new sewing machine would be depreciated according to the declining-balance method at a rate of 20%. The salvage value is expected to be $379,300. This new equipment would require maintenance costs of $99,000 at the end of the fifth year. The cost of capital is 9%. Click here to view the factor table. Use the net present value method to determine the following: (If net present value is negative then enter with negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round present value answer to O decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Calculate the net present value. Net present value $

Hillsong Inc. manufactures snowsuits. Hillsong is considering purchasing a new sewing machine at a cost of $2.45 million. Its existing machine was purchased five years ago at a price of $1.8 million; six months ago, Hillsong spent $55,000 to keep it operational. The existing sewing machine can be sold today for $246,049. The new sewing machine would require a one-time, $85,000 training cost. Operating costs would decrease by the following amounts for years 1 to 7: Year 1 2 3 4 5 6 7 $389,200 399,800 410,200 425,900 432,400 435,200 436,800 The new sewing machine would be depreciated according to the declining-balance method at a rate of 20%. The salvage value is expected to be $379,300. This new equipment would require maintenance costs of $99,000 at the end of the fifth year. The cost of capital is 9%. Click here to view the factor table. Use the net present value method to determine the following: (If net present value is negative then enter with negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round present value answer to O decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Calculate the net present value. Net present value $

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 4P

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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.
At Stardust Gems, a faux gem and jewelry company, the setting department is a bottleneck. The company is considering hiring an extra worker, whose salary will be $67,000 per year, to ease the problem. Using the extra worker, the company will be able to produce and sell 9,000 more units per year. The selling price per unit is $20. The cost per unit currently is $15.85 as shown: What is the annual financial impact of hiring the extra worker for the bottleneck process?
Artisan Metalworks has a bottleneck in their production that occurs within the engraving department. Jamal Moore, the COO, is considering hiring an extra worker, whose salary will be $55,000 per year, to solve the problem. With this extra worker, the company could produce and sell 3,000 more units per year. Currently, the selling price per unit is $25 and the cost per unit is $7.85. Using the information provided, calculate the annual financial impact of hiring the extra worker.
Garrison Boutique, a small novelty store, just spent $4,000 on a new software program that will help in organizing its inventory. Due to the steep learning curve required to use the new software, Garrison must decide between hiring two part-time college students or one full-time employee. Each college student would work 20 hours per week, and would earn $1 S per hour. The full-time employee would work 40 hours per week and would earn $15 per hour plus the equivalent of $2 per hour in benefits. Employees are given two polo shirts to wear as their uniform. The polo-shirts cost Garrison $10 each. What are the relevant costs, relevant revenues, sunk costs, and opportunity costs for Garrison?
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.
Jamboree Outfitters, Inc., produces pocket knives and fillet knives for outdoor sporting. In the process of making the knives, some irregularities occur and no further work is performed on the blades. Jamboree has been selling these irregular blades to scrap dealers for $5.00 per pound. Last year, the company sold 50,000 lbs. of scrap. The company found that Amazon will buy the irregular knives for $12 each provided Jamboree finishes producing the knives into sellable form and also assuming there are enough irregular blades to make 50,000 completed knives. Jamborees processes would not need reprogramming, particularly in the shaping and sharpening processes. However, this would require one additional worker, and new packaging would be needed. The total variable cost to produce the irregulars is $4.85. Fixed costs would increase by $175,000 per year for the lease of the packaging equipment and the new worker. Jamboree estimates it could produce and sell 50,000 knives per year. Should Jamboree continue to sell the scrap blades or should Jamboree process the irregulars to sell to Amazon?
Variety Artisans has a bottleneck in their production that occurs within the engraving department. Arjun Naipul, the COO, is considering hiring an extra worker, whose salary will be $45,000 per year, to solve the problem. With this extra worker, the company could produce and sell 3,500 more units per year. Currently, the selling price per unit is $18 and the cost per unit is $5.85. Using the information provided, calculate the annual financial impact of hiring the extra worker.
Thaler Company bought 26,000 of raw materials a year ago in anticipation of producing 5,000 units of a deluxe version of its product to be priced at 75 each. Now the price of the deluxe version has dropped to 35 each, and Thaler is now deciding whether to produce 1,500 units of the deluxe version at a cost of 48,000 or to scrap the project. What is the opportunity cost of this decision? a. 175,000 b. 375,000 c. 48,000 d. 26,000
Quality Clothing, Inc., produces skorts and jumper uniforms for schoolchildren. In the process of cutting out the cloth pieces for each product, a certain amount of scrap cloth is produced. Quality has been selling this cloth scrap to Jorges Scrap Warehouse for $3.25 per pound. Last year, the company sold 40,000 lb. of scrap, which would be enough to make 10,000 teddy bears that the management of Quality is now interested in producing. Their processes would need some reprogramming, particularly in the cutting and stitching processes, but it would require no additional worker training. However, new packaging would be needed. The total variable cost to produce the teddy bears $3.85. Fixed costs would increase by $95,000 per year for the lease of the packaging equipment and Quality estimates it could produce and sell 10,000 teddy bears per year. Finished teddy bears could be sold for $18.00 each. Should Quality continue to sell the scrap cloth or should Quality process the scrap into teddy bears to sell?
Basuras Waste Disposal Company has a long-term contract with several large cities to collect garbage and trash from residential customers. To facilitate the collection, Basuras places a large plastic container with each household. Because of wear and tear, growth, and other factors, Basuras places about 200,000 new containers each year (about 20% of the total households). Several years ago, Basuras decided to manufacture its own containers as a cost-saving measure. A strategically located plant involved in this type of manufacturing was acquired. To help ensure cost efficiency, a standard cost system was installed in the plant. The following standards have been established for the products variable inputs: During the first week in January, Basuras had the following actual results: The purchasing agent located a new source of slightly higher-quality plastic, and this material was used during the first week in January. Also, a new manufacturing process was implemented on a trial basis. The new process required a slightly higher level of skilled labor. The higher- quality material has no effect on labor utilization. However, the new manufacturing process was expected to reduce materials usage by 0.25 pound per container. Required: 1. CONCEPTUAL CONNECTION Compute the materials price and usage variances. Assume that the 0.25 pound per container reduction of materials occurred as expected and that the remaining effects are all attributable to the higher-quality material. Would you recommend that the purchasing agent continue to buy this quality, or should the usual quality be purchased? Assume that the quality of the end product is not affected significantly. 2. CONCEPTUAL CONNECTION Compute the labor rate and efficiency variances. Assuming that the labor variances are attributable to the new manufacturing process, should it be continued or discontinued? In answering, consider the new processs materials reduction effect as well. Explain. 3. CONCEPTUAL CONNECTION Refer to Requirement 2. Suppose that the industrial engineer argued that the new process should not be evaluated after only one week. His reasoning was that it would take at least a week for the workers to become efficient with the new approach. Suppose that the production is the same the second week and that the actual labor hours were 9,000 and the labor cost was 99,000. Should the new process be adopted? Assume the variances are attributable to the new process. Assuming production of 6,000 units per week, what would be the projected annual savings? (Include the materials reduction effect.)
Dimitri Designs has capacity to produce 30,000 desk chairs per year and is currently selling all 30,000 for $240 each. Country Enterprises has approached Dimitri to buy 800 chairs for $210 each. Dimitris normal variable cost is $165 per chair, including $50 per unit in direct labor per chair. Dimitri can produce the special order on an overtime shift, which means that direct labor would be paid overtime at 150% of the normal pay rate. The annual fixed costs will be unaffected by the special order and the contract will not disrupt any of Dimitris other operations. What will be the impact on profits of accepting the order?
Country Diner currently makes cookies for its boxed lunches. It uses 40,000 cookies annually in the production of the boxed lunches. The costs to make the cookies are: A potential supplier has offered to sell Country Diner the cookies for $0.85 each. If the cookies are purchased, 10% of the fixed overhead could be avoided. If Jason accepts the offer, what will the effect on profit be?