Question

It is a story of long struggle to establish a new business. Finally, the Shop-XP735 got its dream team of friendly staffs who are working together for years and the customer base of the shop has been developed through personal relationship built up over years between its staffs and customers. Team manager cannot think of running the shop without these staffs.

The owner of the Shop-XP735 is considering whether to buy a fully automatic production machine. Staffs of the shop are widely supportive of the purchase because it would eliminate a tedious part of their work. Accountant of the shop provides the following information to the owner.

> The cost, excluding installation cost of $1,060, for the automatic production machine is $24,859.

> Annual cost savings include labour cost of $3,199 and raw materials cost of $2,341 for 9 years.

> 8.4 per cent annual depreciation will increase depreciation expense by $1,014 per year for 9 years.

> The opportunity cost for the investment would be 12.5 per cent.

> Tax rate is 38 per cent.

Above information is leaked out to the staffs and they are in festive mood as the cost of machine is lower than the total savings of labour and materials cost in 9 years.

However, the owner is not happy with the numbers and she is planning to cancel the idea of buying the machine. Sensing the decision of Jim, his staff becomes highly demoralised and a few of them are even thinking of leaving the job.

In the final meeting to decide on this investment decision, two of the oldest staffs provide two surprising offers to the owner. One staff offers $4,009 salvage value for the machine after 9 years and the other staff offers a loan arrangement to pay he purchase price of the machine at 6 per cent interest so that the owner has to pay equal yearly instalments at the beginning of each year for 9 years.

Requirement: Show your calculations and then write a brief report (with supporting calculations) and make recommendations to either accept or reject the project with full explanations (including quantitative and qualitative factors). Discussion should include the impact of the offers made by staffs in the meeting.  

Please solve it with details, thank you

Answer 1