Answered: Should the old machine be retained or…

Business

Accounting

Should the old machine be retained or replaced?

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 4P: Although the Chen Company’s milling machine is old, it is still in relatively good working order and...

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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?
Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new design will eliminate the production of a toxic solid residue. The initial cost of the system is estimated at 860,000 and includes computerized equipment, software, and installation. There is no expected salvage value. The new system has a useful life of 8 years and is projected to produce cash operating savings of 225,000 per year over the old system (reducing labor costs and costs of processing and disposing of toxic waste). The cost of capital is 16%. Required: 1. Compute the NPV of the new system. 2. One year after implementation, the internal audit staff noted the following about the new system: (1) the cost of acquiring the system was 60,000 more than expected due to higher installation costs, and (2) the annual cost savings were 20,000 less than expected because more labor cost was needed than anticipated. Using the changes in expected costs and benefits, compute the NPV as if this information had been available one year ago. Did the company make the right decision? 3. CONCEPTUAL CONNECTION Upon reporting the results mentioned in the postaudit, the marketing manager responded in a memo to the internal audit department indicating that cash inflows also had increased by a net of 60,000 per year because of increased purchases by environmentally sensitive customers. Describe the effect that this has on the analysis in Requirement 2. 4. CONCEPTUAL CONNECTION Why is a postaudit beneficial to a firm?
Elmdale Company has a machine that affixes labels to bottles. The machine has a book value of $80,000 and a remaining useful life of 3 years and no salvage value. A new, more efficient machine is available at a cost of $300,000 that will have a 5-year useful life with no salvage value. The new machine will lower annual variable production costs from $520,000 to $410,000.Prepare an analysis showing whether the old machine should be retained or replaced. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Retain Equipment Replace Equipment Net Income Change New machine costVariable manufacturing costsFixed manufacturing costsNet savings over 3 years $ $ $ Variable manufacturing costsNet savings over 3 yearsFixed manufacturing costsNew machine cost Net savings over 3 yearsVariable manufacturing costsNew machine costFixed manufacturing costs…
Kalamoo Company has a machine that affixes labels to bottles. The machine has a book value of $60,000 and a remaining useful life of 3 years and no salvage value. A new, more efficient machine is available at a cost of $225,000 that will have a 5-year useful life with no salvage value. The new machine will lower annual variable production costs from $400,000 to $310,000. Should the old machine be retained or replaced?
Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $45,000 and a remaining useful life of five years, at which time its salvage value will be zero. It has a current market value of $52,000. Variable manufacturing costs are $36,000 per year for this machine. Information on two alternative replacement machines follows. Should Xinhong keep or replace its manufacturing machine? If the machine should be replaced, which alternative new machine should Xinhong purchase?
The Container Corporation of America is considering replacing an automatic painting machine purchased 9 years ago for $700,000. It has a market value today of $40,000. The unit costs $350,000 annually to operate and maintain. A new unit can be purchased for $800,000 and will have annual O&M costs of $120,000. If the old unit is retained, it will have no salvage value at the end of its remaining life of 10 years. The new unit, if purchased, will have a salvage value of $100,000 in 10 years. Using an EUAC measure and a MARR of 20% should the automatic painting machine be replaced if the old automatic painting machine is taken as a trade-in for its market value of $40,000? Solve, a. Use the cash flow approach (insider’s viewpoint approach). b. Use the opportunity cost approach (outsider’s view point approach).
Elmdale Company has a machine that affixes labels to bottles. The machine has a book value of $80,000 and a remaining useful life of 3 years and no salvage value. A new, more efficient machine is available at a cost of $300,000 that will have a 3-year useful life with no salvage value. The new machine will lower annual variable production costs from $520,000 to $410,000. Prepare an analysis showing whether the old machine should be retained or replaced. (If the net income change is negative, enter the amounts using either a negative sign preceding the number e.g. -45 or parenthesis e.g. (45). Do not leave any answer field blank. Enter O for amounts.) $ Retain Equipment $ Replace Equipment $ $ Net Income Change
A company is considering replacing an old machine. The trade-in value of the old machine is currently $30,000. The unit costs $250,000 annually to operate and maintain. A new unit can be purchased for $700,000 and will have annual O&M costs of $120,000. If the old unit is retained it will have no salvage value at the end of its remaining life of 10 years. The new unit, if purchased, will have a salvage value $50,000 in 10 years. Find a) the equivalent uniform annual cost (EUAC) for keeping the old machine, and b) the EUAC for replacing the old machine with the new machine. Should the old machine be replaced based on your calculations? The MARR is 10%. Use the cash flow approach (insider's viewpoint approach)
The Sumitomo Chemical Corporation is considering replacing a 5-year-old machine that originally cost $50,000 and can be sold for $60,000. This machine is totally depreciated. The replacement machine would cost $125,000 and have a 5-year expected life over which it would be depreciated down using the straight-line method and have no salvage value at the end of five years. The new machine would produce savings before depreciation and taxes of $45,000 per year. Assuming a 34 percent marginal tax rate and a required return of 10%, calculate The internal rate of return and the net present value. Please show work in Excel.
A bioengineer is evaluating methods used to apply an adhesive to microporous paper tape that is commonly used after surgery. The machinery costs $200,000, has no salvage value, and the CFBT estimate is $75,000 per year for up to 10 years. The Te = 38% and i = 8% per year. The two depreciation methods to consider are: MACRS with n = 5 years and SL with n = 8 years (neglect the halfyear convention effect). For a study period of 8 years, (a) determine which depreciation method and recovery period offers the better tax advantage, and (b) demonstrate that the same total taxes are paid for MACRS and SL depreciation.
Denny Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $290,000 and have a tenericals controll nortunately, the new machine would have no salvage value. The new machine would cost $48,000 per year to operate and maintain but would save $89,000 per year in labor and other costs. The old machine can be sold now for scrap for $29,000. The simple rate of return on the new machine is closest to (Ignore income taxes.):
Kitchen Supplies, Inc. must replace a machine in its manufacturing plant that will have no salvage value. It has a choice between two models. The first machine will last 5 years and will cost $300,000. It will generate an annual cost savings of $50,000. Annual maintenance costs will be $20,000. The machine will be fully depreciated using the straight-line depreciation method and will have no salvage value. The second machine will last 7 years and will cost $600,000. It will generate an annual cost savings of $70,000. This machine will also be fully depreciated using the straight-line depreciation method, but is expected to have a salvage value of $60,000 at the end of the seventh year. The annual maintenance cost is $15,000. Revenues in each case are expected to be the same. The annual tax rate is 35% and the cost of capital is 10%. Which machine should the company purchase?