The Managerial Accounting Department at your company has been engaged by the Pro
ID: 2532646 • Letter: T
Question
The Managerial Accounting Department at your company has been engaged by the Production Department for assistance in evaluating a purchase decision. The equipment the production department is currently utilizing is outdated and has become costly to maintain. New machines would also provide increased efficiencies leading to increased sales. Due to this, the department is considering replacing all equipment with new machines.
Data:
- Cost of Current Machines: $800,000
- Cost of New Machines: $1,250,000
- Annual Maintenance on Current Machines: $125,000
- Annual Maintenance on New Machines: $54,000
- Salvage Value of Current Machines: $325,000
- Immediate employee training cost on new machines: $15,000 - Working Capital needed for new machines: $50,000
- Would be needed once machines are purchased and working capital released after 5 years
- Increased sales opportunity provided by new machines: $200,000 first year and growing at 5% per year after
- Company’s Required Rate of Return: 10%
- Contribution margin: 47%
- Depreciation and income taxes should be ignored.
please provide the following this week:
Enter relevant costs and revenues into the template provided.
? Be sure the costs are entered into any and all relevant years
Sum the Net Cash In/Outflows for each year
Identify the appropriate discount factors to be used in the analysis. List these by year in the template.
s Numbers File Edit Insert Table Format Arrange View Share ** Window Help CB template 2 * 100% E Fri 1 View 75% Zoom NPV Insert Table Chart Text co Collaborate Shape Media Comment SeleExplanation / Answer
Evaluation of Decision Particular Years( Figure $) 0 1 2 3 4 5 OutFlow 1. Investment in New Machinery ( Cost of New Mh - Salvage value of Old Mh) > 1250000-325000 925000 0 0 0 0 0 2 . Annual Maintence cost of Machine 0 54000 54000 54000 54000 54000 3 Training Cost 15000 0 0 0 0 0 Working Capital 50000 0 0 0 0 0 Total Outflow 990000 54,000.00 54,000.00 54,000.00 54,000.00 54,000.00 Discounting Factor 1.00 0.909 0.826 0.751 0.683 0.621 Present Value 990000 49086 44604 40554 36882 33534 Inflow 1 Additional Contribution ( Sales * Contribution Margin) (with 5% Growth) 0 94000 98700 103635 108816.75 114257.588 2 Saving in Annual Maintence Cost 0 125000 125000 125000 125000 125000 3. Release of Working Capital 0 0 0 0 0 50000 Total Inflow 0 219,000.00 223,700.00 228,635.00 233,816.75 289,257.59 Discounting Factor 1.00 0.909 0.826 0.751 0.683 0.621 Present Value 0 199071 184776.2 171704.885 159696.84 179628.962 Present Value of Inflow 894,877.89 Present Value of Outflow 1,194,660.00 NPV (299,782.11)
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