As a manager, part of your role is to develop strategy, and share this strategy
ID: 2470719 • Letter: A
Question
As a manager, part of your role is to develop strategy, and share this strategy with various stakeholders within the organization. This assignment will allow you to take your findings as a manager and communicate these findings to those who are affected.
Your company has been presented with a decision on replacing a piece of equipment for a new computerized version that promotes efficiency for the upcoming year. As manager you will need to decide whether or not the purchase of the new equipment is a worthwhile investment and to communicate your recommendations to Executive Management for a final decision. To be convincing, sufficient support for your recommendations must be provided in order to be considered valid and accepted.
In this assignment, use the information above to develop a comprehensive analysis using NPV, Payback Method, and IRR to develop a recommendation on replacing the existing equipment with a new computerized version.
Existing Equipment Original Cost 60,000 Present Book Value 30,000 Annual Cash Operating Costs 145,000 Current Market Value 15,000 Market Value in Ten Years 0 Remaining useful Life 10 yearsExplanation / Answer
Calculation of Depreciation saving with replacing new equipment Depreciation Per Year on New Equipment 60000 (600000/10 years) Less: Depreciation Per Year on Old Equipment 3000 (30000/10 years) Net Savings Per Year 57000 Calculation of Incremental savings in cost with Replacing New asset Years Particulars 1 2 3 4 5 6 7 8 9 10 Anuual Savings in Operating Cost (145000-50000) 95000 95000 95000 95000 95000 95000 95000 95000 95000 95000 Net savings in Depreciation Per Year 57000 57000 57000 57000 57000 57000 57000 57000 57000 57000 Total Savings 152000 152000 152000 152000 152000 152000 152000 152000 152000 152000 Cost of Capital @ 10% 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132 0.4665 0.4241 0.3855 (PV Factor @ 10%) PV Of Savings 138182 125620 114200 103818 94380 85800 78000 70909 64463 58603 Total Savings 933974 Initial Net Cash Outflow (600000-15000) 585000 (Market Value of New asset- Old asset) NPV 348974 Payback Period = (Initial Investment / Yearly Cash Flow 3.85 Years (585000/152000) Decision Here the NPV Is Postive with Replacing new equipment and Payback period also less than the 6 years Decision : Based on the above comments Replacing of New Equipment with a new computerised version is advisable Replacing the New equipment.
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