Question

In: Accounting

An assembly operation at a software company currently requires ​$96,000 per year in labor costs. A...

An assembly operation at a software company currently requires ​$96,000 per year in labor costs. A robot can be purchased and installed to automate this​ operation, and the robot will cost $192,000 with no MV at the end of its​ 10-year life. The​ robot, if​ acquired, will be depreciated using SL depreciation to a terminal BV of zero after 10 years. Maintenance and operation expenses of the robot are estimated to be $70,000per year. The company has an effective income tax rate of 24​%. Invested capital must earn at least 6​% after income taxes are taken into account.

a. Use the IRR method to determine if the robot is a justifiable investment.

b. If MACRS​ (seven-year recovery​ period) had been used in Part​ (a), would the​ after-tax IRR be lower or higher than your answer to Part​ (a)?

Solutions

Expert Solution

a)
Year 0 1 2 3 4 5 6 7 8 9 10
Initial Investment $      (192,000)
Annual Net Savings =(96000 -70000) $      26,000 $               26,000 $               26,000 $      26,000 $      26,000 $      26,000 $      26,000 $      26,000 $      26,000 $      26,000
Less: Depreciation $      19,200 $               19,200 $               19,200 $      19,200 $      19,200 $      19,200 $      19,200 $      19,200 $      19,200 $      19,200
Net Operating Income $        6,800 $                 6,800 $                 6,800 $        6,800 $        6,800 $        6,800 $        6,800 $        6,800 $        6,800 $        6,800
Less: Tax @ 24% $        1,632 $                 1,632 $                 1,632 $        1,632 $        1,632 $        1,632 $        1,632 $        1,632 $        1,632 $        1,632
Net  Income $        5,168 $                 5,168 $                 5,168 $        5,168 $        5,168 $        5,168 $        5,168 $        5,168 $        5,168 $        5,168
Add: Depreciation $      19,200 $               19,200 $               19,200 $      19,200 $      19,200 $      19,200 $      19,200 $      19,200 $      19,200 $      19,200
Net operating Cash flow $      (192,000) $      24,368 $               24,368 $               24,368 $      24,368 $      24,368 $      24,368 $      24,368 $      24,368 $      24,368 $      24,368
IRR 4.59%
b)
Year 0 1 2 3 4 5 6 7 8 9 10
Initial Investment $ (192,000.00)
Annual Net Savings =(96000 -70000) $ 26,000.00 $          26,000.00 $          26,000.00 $ 26,000.00 $ 26,000.00 $ 26,000.00 $ 26,000.00 $ 26,000.00 $ 26,000.00 $ 26,000.00
Less: MACRS​ (seven-year recovery​ period) $ 27,436.80 $          47,020.80 $          33,580.80 $ 23,980.80 $ 17,145.60 $ 17,126.40 $ 17,145.60 $   8,563.20
Net Operating Income $ (1,436.80) $        (21,020.80) $          (7,580.80) $   2,019.20 $   8,854.40 $   8,873.60 $   8,854.40 $ 17,436.80 $ 26,000.00 $ 26,000.00
Less: Tax @ 24% $    (344.83) $          (5,044.99) $          (1,819.39) $      484.61 $   2,125.06 $   2,129.66 $   2,125.06 $   4,184.83 $   6,240.00 $   6,240.00
Net  Income $ (1,091.97) $        (15,975.81) $          (5,761.41) $   1,534.59 $   6,729.34 $   6,743.94 $   6,729.34 $ 13,251.97 $ 19,760.00 $ 19,760.00
Add: Depreciation $ 27,436.80 $          47,020.80 $          33,580.80 $ 23,980.80 $ 17,145.60 $ 17,126.40 $ 17,145.60 $   8,563.20 $              -    $              -   
Net operating Cash flow $ (192,000.00) $ 26,344.83 $          31,044.99 $          27,819.39 $ 25,515.39 $ 23,874.94 $ 23,870.34 $ 23,874.94 $ 21,815.17 $ 19,760.00 $ 19,760.00
IRR 4.93%
This is less than the after-tax MARR, so the robot should not be purchased.

ekkarill92 answered 1 year ago
Next > < Previous

Related Solutions

Labor Costs and Productivity - (A) Your Texas assembly line employees earn $20 per hour and...
Labor Costs and Productivity - (A) Your Texas assembly line employees earn $20 per hour and they produce an average of 8 toaster ovens per hour. You are considering relocating your toaster over assembly facility just across the border to Mexico where wages are only $8 per hour. Transportation costs to your market would be the same. How many toaster ovens per hour would your foreign employees have to produce in order for this move to break even? (PLEASE INCLUDE...
An IT company is considering implementing an automated system to save on software testing labor costs...
An IT company is considering implementing an automated system to save on software testing labor costs manually. The entire system will be financed through a bank loan, to be repaid in 3 equal annual installments. The financial data relevant to this project is given in the table below:. COSTS AMOUNT System Hardware Purchase Cost $325,000 Operating Software Fee (at n=0) $25,000 Bank Loan Interest rate (compounded annually) 10% System Life 3 years Salvage Value (at n=3) $100,000 Capital Cost Allowance...
A rotational molding operation has fixed costs of $7,000 per year and variable costs of $47...
A rotational molding operation has fixed costs of $7,000 per year and variable costs of $47 per unit. If the process is automated via conveyor, its fixed cost will be $49,000 per year, but its variable cost will be only $10 per unit. Determine the number of units each year necessary for the two operations to break even.
A rotational molding operation has fixed costs of $6,000 per year and variable costs of $45...
A rotational molding operation has fixed costs of $6,000 per year and variable costs of $45 per unit. If the process is automated via conveyor, its fixed cost will be $43,000 per year, but its variable cost will be only $10 per unit. Determine the number of units each year necessary for the two operations to break even. The number of units each year necessary for the two operations to break even is determined to be  .
Assume a product has the following activities and overhead costs: Production ($40 per labor hour) Assembly...
Assume a product has the following activities and overhead costs: Production ($40 per labor hour) Assembly ($25 per labor hour) Quality Inspection ($100 per inspection) Also assume that each product requires 5 hours of direct labor hours for production, 4 hours of direct labor hours for assembly, and one inspection for every 10 units produced. If the company produces 100 units, what is the total overhead cost?
company produces washers and dryers in an assembly - line process Labor costs incurred during a...
company produces washers and dryers in an assembly - line process Labor costs incurred during a recent period were: corporate executives, $ 500,000; assembly - line workers, $ 203,000; security guards, $ 45,000; and plant supervisor, $ 110,000. The total of a company's direct labor cost was: Select one: O a $ 858,000 b. $ 748,000 c. $ 203,000 d. $ 197,000 O e. $ 313,000
Variable costs per unit: Direct materials $ 91 Fixed costs per year: Direct labor $ 1,317,900...
Variable costs per unit: Direct materials $ 91 Fixed costs per year: Direct labor $ 1,317,900 Fixed manufacturing overhead $ 4,068,300 Fixed selling and administrative expenses $ 2,088,000 The company does not have any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, the company produced 57,300 units and sold 55,300 units. The company’s only product is sold for $234 per unit. The company is considering using either super-variable costing or a variable...
Albinson Company paid $96,000 for a two-year insurance policy on October 1 and recorded the $96,000...
Albinson Company paid $96,000 for a two-year insurance policy on October 1 and recorded the $96,000 as a debit to Prepaid Insurance and a credit to Cash. What adjusting entry should Albinson make on December 31, the end of the accounting period (no previous adjustment has been made)? Select one: A. Insurance Expense 12,000 Prepaid Insurance 12,000 B. Insurance Expense 48,000 Prepaid Insurance 48,000 C. Prepaid Insurance 12,000 Insurance Expense 12,000 D. Prepaid Insurance 84,000 Insurance Expense 84,000
`Sports Wear manufactures speciality clothing. The company requires 30,000 meters of fabric per year. Currently management...
`Sports Wear manufactures speciality clothing. The company requires 30,000 meters of fabric per year. Currently management orders 1,000 meters per order and the cost of each meter is $6. The ordering cost is $360 per order and carrying cost is $ 2.4 per year. Lead time is 3 weeks. The company operates 50 weeks per year. Required: Compute the total inventory costs under current plan? Assuming no safety stock when TSP would make an order (reorder            point)? One supplier...
An assembly operation requires a 1-month training period for a new employee to reach max efficiency....
An assembly operation requires a 1-month training period for a new employee to reach max efficiency. A new method of training was suggested and a test conducted to compare the new method with the standard procedure. Two groups of nine new employees were trained for a period of 3 weeks, one group using the new method and the other following standard training procedure. The length of time in minutes required for each employee to assemble the device was recorded at...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT