Aurora Company is considering the purchase of a new machine. The
invoice price of the machine is $123,000, freight charges are
estimated to be $4,000, and installation costs are expected to be
$5,000. Salvage value of the new equipment is expected to be zero
after a useful life of 5 years. Existing equipment could be
retained and used for an additional 5 years if the new machine is
not purchased. At that time, the salvage value of the equipment
would be zero. If the new machine is purchased now, the existing
machine would have to be scrapped. Aurora’s accountant, Lisah
Huang, has accumulated the following data regarding annual sales
and expenses with and without the new machine.
| 1. | Without the new machine, Aurora can sell 11,000 units of product annually at a per unit selling price of $100. If the new machine is purchased, the number of units produced and sold would increase by 10%, and the selling price would remain the same. | ||
| 2. | The new machine is faster than the old machine, and it is more efficient in its usage of materials. With the old machine the gross profit rate will be 25% of sales, whereas the rate will be 30% of sales with the new machine. | ||
| 3. | Annual selling expenses are $158,000 with the current equipment. Because the new equipment would produce a greater number of units to be sold, annual selling expenses are expected to increase by 10% if it is purchased. | ||
| 4. | Annual administrative expenses are expected to be $88,000 with the old machine, and $99,000 with the new machine. | ||
| 5. | The current book value of the existing machine is $32,000. Aurora uses straight-line depreciation. |
Prepare an incremental analysis for the 5 years. (Ignore income tax
effects.) (Enter negative amounts using either a
negative sign preceding the number e.g. -45 or parentheses e.g.
(45).)
| Retain Old Machine | Purchase New Machine | Net Income
Increase (Decrease) |
|||||||
| Sales | $ | $ | $ | ||||||
| Costs and expenses | |||||||||
| Cost of goods sold | |||||||||
| Selling expenses | |||||||||
| Administrative expenses | |||||||||
| Purchase price | |||||||||
| Total costs and expenses | |||||||||
| Net income | $ | $ | $ | ||||||
Should Aurora keep the existing machine or buy the new
machine?
| Aurora should keep the existing machine or buy the new
machine |
In: Accounting
Waterways puts much emphasis on cash flow when it plans for
capital investments. The company chose its discount rate of 8%
based on the rate of return it must pay its owners and creditors.
Using that rate, Waterways then uses different methods to determine
the best decisions for making capital outlays.
This year Waterways is considering buying five new backhoes to
replace the backhoes it now has. The new backhoes are faster, cost
less to run, provide for more accurate trench digging, have comfort
features for the operators, and have 1-year maintenance agreements
to go with them. The old backhoes are working just fine, but they
do require considerable maintenance. The backhoe operators are very
familiar with the old backhoes and would need to learn some new
skills to use the new backhoes.
The following information is available to use in deciding whether
to purchase the new backhoes.
| Old Backhoes | New Backhoes | |||
| Purchase cost when new | $89,400 | $200,878 | ||
| Salvage value now | $41,600 | |||
| Investment in major overhaul needed in next year | $55,083 | |||
| Salvage value in 8 years | $15,200 | $91,000 | ||
| Remaining life | 8 years | 8 years | ||
| Net cash flow generated each year | $30,100 | $43,400 |
Click here to view PV table.
(a) Evaluate in the following ways whether to
purchase the new equipment or overhaul the old equipment.
(Hint: For the old machine, the initial investment is the
cost of the overhaul. For the new machine, subtract the salvage
value of the old machine to determine the initial cost of the
investment.)
(1) Using the net present value method for buying new or keeping
the old.
| New Backhoes | Old Backhoes | |||
| Net Present Value | $ | $ |
(2) Using the payback method for each choice. (Hint:
For the old machine, evaluate the payback of an overhaul.)
(Round answers to 2 decimal places, e.g.
1.25)
| New Backhoes | Old Backhoes | |||
| Payback Period | years | years |
Calculate the internal rate of return factor for the new and old
blackhoes. (Round answers to 5 decimal places, e.g.
5.27647.)
| New Backhoes | Old Backhoes | |||
| IRR Factor |
In: Finance
Aurora Company is considering the purchase of a new machine. The
invoice price of the machine is $140,000, freight charges are
estimated to be $4,000, and installation costs are expected to be
$6,000. Salvage value of the new equipment is expected to be zero
after a useful life of 5 years. Existing equipment could be
retained and used for an additional 5 years if the new machine is
not purchased. At that time, the salvage value of the equipment
would be zero. If the new machine is purchased now, the existing
machine would have to be scrapped. Aurora’s accountant, Lisah
Huang, has accumulated the following data regarding annual sales
and expenses with and without the new machine.
| 1. | Without the new machine, Aurora can sell 12,000 units of product annually at a per unit selling price of $100. If the new machine is purchased, the number of units produced and sold would increase by 10%, and the selling price would remain the same. | ||
| 2. | The new machine is faster than the old machine, and it is more efficient in its usage of materials. With the old machine the gross profit rate will be 25% of sales, whereas the rate will be 30% of sales with the new machine. | ||
| 3. | Annual selling expenses are $180,000 with the current equipment. Because the new equipment would produce a greater number of units to be sold, annual selling expenses are expected to increase by 10% if it is purchased. | ||
| 4. | Annual administrative expenses are expected to be $100,000 with the old machine, and $113,000 with the new machine. | ||
| 5. | The current book value of the existing machine is $36,000. Aurora uses straight-line depreciation. |
With the class divided into groups, prepare an incremental analysis
for the 5 years. (Ignore income tax effects.) (Enter
negative amounts using either a negative sign preceding the number
e.g. -45 or parentheses e.g. (45).)
| Retain Old Machine | Purchase New Machine | Net Income
Increase (Decrease) |
|||||||
| Sales | $ | $ | $ | ||||||
| Costs and expenses | |||||||||
| Cost of goods sold | |||||||||
| Selling expenses | |||||||||
| Administrative expenses | |||||||||
| Purchase price | |||||||||
| Total costs and expenses | |||||||||
| Net income | $ | $ | $ | ||||||
Should Aurora keep the existing machine or buy the new
machine?
| Aurora should keep the existing machine or buy the new machine? |
In: Accounting
In: Economics
There are seven stages in the new-product development process that businesses must perform in order to ensure a better chance of success in their new product launches.
(a) Identify (list out) each stage in the 7 new-product development processes in the correct order or sequence.
(b) Briefly describe what a business organization would often do in the second stage of their new-product development process.
In: Finance
Integrated Marketing Communications
How integrated marketing communications can add value for Tesla customers. Considering your new target market and any modifications, new product line extensions or new products you may have developed to serve the new target market needs, create your 'Big Idea" to be the basis of the message strategy for all your marketing communications.
In: Operations Management
The distribution of the prices of new phone is positively skewed with a long tail to the right, in a random sample of people who have purchased a new phone, a mean and standard deviation price of a new phone is reported to be $400 and $50 respectively.
What is the standard deviation of price of a new phone costing $500 in this distribution? Please indicate the standard deviation with the sign (negative and positive) and in the unit as “s”
In: Statistics and Probability
In C, write a function that inserts a new node by taking four arguments, a head, tail, current node, and new node pointers. If head is NULL, perform head insertion, otherwise transverse the linked list recursively by using current node pointer. Terminate when the current node points at the tail after inserting new node at tail and pointing tail at new node.
In: Computer Science
A car parts manufacturing company is considering investing in the development of a new robot. The new robot is based on a new technology, so there is some uncertainty associated with its performance level. They estimated that the new robot may exhibit high, medium, and low performance levels with the probabilities of 0.35, 0.55, and 0.10 respectively. The annual savings corresponding to high, medium, and low performance levels are $500 000, $250 000, and $125 000 respectively. The development cost of the new robot is $550 000. The MARR is 10%
a. On the basis of a five-year study period, what is the present worth of the new robot for the high performance scenario?
b. On the basis of a five-year study period, what is the present worth of the new robot for the medium performance scenario?
c. On the basis of a five-year study period, what is the present worth of the new robot for the low performance scenario?
d. Using a decision tree and assuming that the present worths are $1,000,000, $300,000 and -$10,000 for the high, medium and low performance scenarios respectively, what is the expected present worth?
In: Finance
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