Key Equipment The team has the basic hand tools to manufacture the wagons. This
ID: 2564514 • Letter: K
Question
Key Equipment The team has the basic hand tools to manufacture the wagons. This is how the team generated the samples which were sold for the estimate of sales volumes. There are four other pieces of machinery that the team feels will save money. These pieces of equipment are a multi head drill machine, side bore drill machine, miter saw, and/ or a conveyor. The cost, savings and scrap values are in the following table. Table 2: Savings on Additional Equipment Cost Savings Scrap Value Multi Head Drill 4,000 1,020 1,480 Side Bore Machine 1,000 $ 380 $ 300 Miter Saw Conveyor S 580 210 S130 750 225 (25) savings are based on 200 wagons per month. Assume the life of the equipment will be 5 years and that at the end of the five-year period the equipment will be sold for the scrap value. Set the hurdle rate at 15%. This is the cost of money for this manufacturing venture. Which piece or pieces of equipment will be best for operations?Explanation / Answer
To compute the best piece of equipment will be depend on NPV of all the four options, which ever project NPV should be higher that project will be best -
Calcualtion of NPV in all option -
from the above computation Side bore machine is the best option as it has the highest NPV.
Please note all values are in $.
In case of any clarification required please comment.
Multi head drill year 0 1 2 3 4 5 NPV Initial cost -4000 Savings 1020 1020 1020 1020 1020 Scrap value 1480 less Dep 800 800 800 800 800 EBIT 220 220 220 220 1700 less tax @ 0 0 0 0 0 0 EAT 220 220 220 220 1700 add Dep 800 800 800 800 800 Cash flow 1020 1020 1020 1020 2500 Discounting @15% 1 0.869565 0.756144 0.657516 0.571753 0.497177 -4000 886.9565 771.2665 670.6666 583.1883 1242.942 155.0198 Side Bore Machine year 0 1 2 3 4 5 NPV Initial cost -1000 Savings 380 380 380 380 380 Scrap value 300 Cash flow 380 380 380 380 680 Discounting @15% 1 0.869565 0.756144 0.657516 0.571753 0.497177 -1000 330.4348 287.3346 249.8562 217.2662 338.0802 422.972 Miter Saw year 0 1 2 3 4 5 NPV Initial cost -580 Savings 210 210 210 210 210 Scrap value 130 Cash flow 210 210 210 210 340 Discounting @15% 1 0.869565 0.756144 0.657516 0.571753 0.497177 -580 182.6087 158.7902 138.0784 120.0682 169.0401 188.5855 Conveyor year 0 1 2 3 4 5 NPV Initial cost -750 Savings 225 225 225 225 225 Scrap value -25 Cash flow 225 225 225 225 200 Discounting @15% 1 0.869565 0.756144 0.657516 0.571753 0.497177 -750 195.6522 170.1323 147.9412 128.6445 99.43535 -8.19452Related Questions
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