R&D; Device at EBP Two years ago East Beach Products (EBP) designed and built in
ID: 2793184 • Letter: R
Question
R&D; Device at EBP Two years ago East Beach Products (EBP) designed and built in-house an R&D; device to measure a critical parameter in evaluating new designs. Based on lessons learned, the testing engineers have found a generic device which can be modified to measure the critical parameter and which eliminates most of the operating problems inherent in the existing design. You have been tasked with evaluating the device's replacement in a time of tight capital and operating budgets. The old device was built for S100,000 and currently has a book value of $48,000. The useful life of the device was estimated at 8 years. The device has no market value but can be scrapped and cannibalized for parts/computers/controls valued at $40,000 today and $5000 less in any succeeding year. Currently, the device costs S32,000 per year to operate (labor and material usage) and another S15,000 per year to maintain. Operating costs are increasing at the rate of S3200 per year (mostly in higher material usage rates) while maintenance costs are increasing at S2300 per year The new device will cost $125,000 after modification by the supplier. The new device is also projected to have a useful life of 10 years. The device is expected to have an operating cost of $26,000 for the first year which increases by 10% each year. The maintenance costs for the device are estimated at $8000 per year and are expected to increase at the rate of $1500 per year. The salvage value is estimated at $98,000 at the end of the first year and $8,000 less each year thereafter 159Explanation / Answer
Old Device Net Present Value
Years
Particulars 1 2 3 4 5 6
Device Cost 32000 35200 38400 41600 44800 48000
Maintenace Cost 15000 17300 19600 21900 24200 26500
Total cost (outflow) 47000 52500 58000 63500 69000 74500
Replace Machine (Inflow) 40000 35000 30000 25000 20000 15000
Net Inflow -7000 -17500 -28000 -38500 -49000 -59500
Pvf @ 6% 0.9434 0.89 0.8396 0.7921 0.7473 0.705
Net Present Value (NPV) -6603.8 -15575 -23508.8 -30495.9 -36617.7 -41947.5
New Device Cost
Years
Particulars 1 2 3 4 5 6
Device Cost 26000 28600 31460 34606 38066.6 41873.26
Maintenace Cost 8000 9500 11000 12500 14000 15500
Total cost (outflow) 34000 38100 42460 47106 52066.6 57373.26
Replace Machine (Inflow) 98000 90000 82000 74000 66000 58000
Net Inflow 64000 51900 39540 26894 13933.4 626.74
Pvf @ 6% 0.9434 0.89 0.8396 0.7921 0.7473 0.705
Net Present Value (NPV) 60377.6 46191 33197.78 21302.74 10412.43 441.8517
Decision Making
Since New Device Replace 1st Year itself because Net Present Value of 60,377.6$
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