A company needs to add boring machine capacity to handle its increased business.
ID: 1123798 • Letter: A
Question
A company needs to add boring machine capacity to handle its increased business. Typically, the products are very intricate and precise and are produced in small quantities. The choice lies between one fully automatic tape-controlled machine or two manually controlled machines. The manual machines will cost $36,500 each. They have estimated lives of 20 years with estimated salvage values of $5,000 each. Annual maintenance and energy cost is estimated as $5,000 for each machine. A major overhaul will be required every 5 years at an estimated cost of $3,000 for each machine. Estimated costs of labor and labor extras are $24,000 a year for each machine. The automatic tape-controlled machine consists of the basic machine and the tape control unit. The basic machine will cost $90,000 and have an estimated life of 20 years with a salvage value of $6,000. Estimated annual maintenance and energy costs are $3,500. A major overhaul will be required every 5 years at an estimated cost of $6,000. The tape control unit will cost $30,000 and have an estimated life of 10 years and a salvage value of $2,500. Its annual maintenance and energy cost will be $1,000. Estimated costs of labor and labor extras are $36,000 a year. If the automatic machine is selected, the estimated extra annual income tax payment is $5,480. Compare the alternatives on the basis of the present worth of the cost of 20 years’ service, using an after-tax i* of 8%.
Explanation / Answer
We have been given information about the capital costs, annual costs and taxes and salvage values for two boring machine variants that may be installed by one company to increase its productions. The automatic and manual variety of machines vary as per their various cost parameters. We are asked to evaluate the alternatives basis the present worth of the cost of the services. We tabulate the costs in the table below. This would help us delineate the annual, periodic components to calculate the net present value. In table 2 we calculate the the Net present value using the NPV function of MS-excel. It is obvious that present value of the services of the fully automatic machine is $582754.17 and that of the manual variant is $643653.77. We would then recommend the fully automatic variant.
information given about cost and cash flow for the machines
fully automatic
number of years
manual controlled
number of years
capital cost
per machine cost
90000
1
36500
2
tape control unit cost
30000
2
NA
periodic cost
overhaul cost per machine in 5 years
6000
3
6000
3
annual costs
annual maintainance and enery per machine
3500
20
5000
20
annual maintainance and enery TCU
1000
20
labor and extra per year per machine
36000
20
24000
20
extra income tax
5480
20
Total Annual Cost for all machines
45980
58000
salvage value
salvage value machines
6000
1
10000
2
salvage value tape control unit
2500
2
TABLE - 2 - NPV Calculations
information given about cost and cash flow for the machines
fully automatic
number of years
manual controlled
number of years
capital cost
per machine cost
90000
1
36500
2
tape control unit cost
30000
2
NA
periodic cost
overhaul cost per machine in 5 years
6000
3
6000
3
annual costs
annual maintainance and enery per machine
3500
20
5000
20
annual maintainance and enery TCU
1000
20
labor and extra per year per machine
36000
20
24000
20
extra income tax
5480
20
Total Annual Cost for all machines
45980
58000
salvage value
salvage value machines
6000
1
10000
2
salvage value tape control unit
2500
2
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.