TimerNotesEvaluateFeebackPrintInfo Course Contents. PROBLEM #6 [CAPITAL BUDGETIN

Question

TimerNotesEvaluateFeebackPrintInfo Course Contents. PROBLEM #6 [CAPITAL BUDGETING] Nautical Creations is one of the largest producers of miniature ships in a bottle. An especially complex part of one of the ships needs special production equipment that is not useful for other products. The company purchased this equipment early in 2013 for $200,000. It is now early in 2017, and the manager of the Model Ships Division, Jeri Finley, is thinking about purchasing new equipment to make this part. The current equipment will last for four more years with zero disposal value at that time. It can be sold immediately for $25,000. The following are last year's total manufacturing costs, when production was 7,200 ships Direct materials Direct labor Variable overhead Fixed overhead Total $25,920 25,560 11,520 32,040 $95,040 The cost of the new equipment is $145,000. It has a four year useful life with an estimated disposal value at that time of $40,000. The sales representative selling the new equipment stated "The new equipment will allow direct labor and variable overhead combined to be reduced by a total of $2.25 per unit." Finley thinks this estimate is accurate, but also knows that a higher quality of direct material will be necessary with the new equipment, costing $0.21 more per unit. Fixed overhead costs will increase by $4,200. Finley expects production to be 7,700 ships in each of the next four years. Assume a discount rate of 3% REQUIRED 1. What is the difference in net present values if Nautical Creations buys the new equipment instead of keeping their current equipment? Submit Answer Tries 0/8 My general preferen ark Export

Explanation / Answer

Net Annual savings in cost: Saving in variable cost: Labour anad overheads 2.25 Less: Increase in Material 0.21 Net savings per unit 2.04 Number of produced 7700 Savings in variable cost 15708 Les: Increase in Fixed cost -4200 Net Annual savings in cost: 11508 Present value of Cash inflows: Present value of Annual savings for 4 years 42775 ($ 11508 *Annuity factor for years3 i.e. 3.717) Present value of Salvage value 35540 ($ 40,000 *PVF at year-4 i.e. 0.8885) Total Present value of Inflows 78315 Present value of outflows: Initial investment 145000 Less: Disposal value of old equipment 25000 Present value of outflows: -120000 Net Present value -41685

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.