Good shoes Limited is a company that deals with production of leather shoes. The manufacturing division manager has proposed the purchase of machine A or B to enhance the production capacity. The machines are mutually exclusive. Machine A costs 30 million while Machine B costs 55 million. The expected cash flows from each of the machines for 3 years are provided below. Year 1 2 3 Machine A 15 million 18 million 20 million Machine B 13 million 17 million 19 million Required: Using NPV technique, advice the manufacturing manager on the best machine to purchase assuming that the cost of capital is 10%

Good shoes Limited is a company that deals with production of leather shoes. The manufacturing division manager has proposed the purchase of machine A or B to enhance the production capacity. The machines are mutually exclusive. Machine A costs 30 million while Machine B costs 55 million. The expected cash flows from each of the machines for 3 years are provided below. Year 1 2 3 Machine A 15 million 18 million 20 million Machine B 13 million 17 million 19 million Required: Using NPV technique, advice the manufacturing manager on the best machine to purchase assuming that the cost of capital is 10%

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 15E: Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided...

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A firm is considering the purchase of a new machine to increase the output of an existing production process. Of all the machines considered, management has narrowed the field to the machines represented by the following cash flows: Machine Initial cost of machine ($) Annual cash flow from machine ($/year) A 6,500 B 17,000 2,000 3,000 Machine A has a service life of 5 years whereas Machine B has a service life of 10 years. The MARR (minimum acceptable rate of return) is 10%. The values of the net present worth (NPW) of Machine A and Machine B are, respectively: Select one: O $1,190 and $1,639 O $1,082 and $1,434 O $945 and $1,050 O $1,012 and $1,237
The production department is proposing the purchase of an automatic insertion machine. It has identified three machines and has asked the accountant to analyze them to determine which one has the best cash payback. Machine A Machine B Machine C Annual cash flow $40,000 $50,000 $75,000 Average investment 300,000 250,000 500,000 a.Machine A b.Machine C c.Machine B d.Machines B and C have the same preferred payback period.
All amounts are in $AUD. In order to satisfy the sharp increase in demand KGN is evaluatinginvesting in a “Mega Warehouse” project in Australia. KGN has already identified two existing warehouses. In order to mitigate the risk and assess the fit for purpose of these facilities KGN asked “Axiom Ltd.” to conduct a technical due diligence. “Axiom Ltd.” is asking $100,000 as a fixed fee for its consulting services. Project A has an initial outlay of dollars $150 million and Project B has an initial outlay of $85 million. Project A will generate additional revenues of 45 million starting at the end of year 1 until the end of year 10. It will also incur additional working capital expenses of $1million immediately, this working capital will be recovered at the end of the project. Project B will generate additional revenues of 25 million starting at the end of year 1 until the end of year 10. It will also incur additional working capital expenses of $2million immediately, this working capital…
All amounts are in $AUD. In order to satisfy the sharp increase in demand KGN is evaluatinginvesting in a “Mega Warehouse” project in Australia. KGN has already identified two existing warehouses. In order to mitigate the risk and assess the fit for purpose of these facilities KGN asked “Axiom Ltd.” to conduct a technical due diligence. “Axiom Ltd.” is asking $100,000 as a fixed fee for its consulting services. Project A has an initial outlay of dollars $150 million and Project B has an initial outlay of $85 million. Project A will generate additional revenues of 45 million starting at the end of year 1 until the end of year 10. It will also incur additional working capital expenses of $1million immediately, this working capital will be recovered at the end of the project. Project B will generate additional revenues of 25 million starting at the end of year 1 until the end of year 10. It will also incur additional working capital expenses of $2million immediately, this working capital…
Two types of continuous production are being considered for a shoe factory, which has the following cash flows: Production “X” Productión “Z” Inicial cost ($) 62,850 77,632 Annual Cost-Operation ($) 15,300 22,900 Rescue value ($) 8,125 17,953 Useful life (Years) 4 6 Using an interest rate of 25% per year. Do a present value analysis using the MCM and select the most suitable type of production. Evidence your process.
Each of the following scenarios is independent. All cash flows are after-tax cash flows. Required: 1. Patz Corporation is considering the purchase of a computer-aided manufacturing system. The cash benefits will be 800,000 per year. The system costs 4,000,000 and will last eight years. Compute the NPV assuming a discount rate of 10 percent. Should the company buy the new system? 2. Sterling Wetzel has just invested 270,000 in a restaurant specializing in German food. He expects to receive 43,470 per year for the next eight years. His cost of capital is 5.5 percent. Compute the internal rate of return. Did Sterling make a good decision?
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
Question1: A company is planning to purchase a new machine to expand the range of its products. There are two brands available in the market: A and B. Both machines are costing 70,000 OMR. The cash inflows given in the table are expected to be generated by both machines. Based on NPV and IPP, identify the better machine if the discounting rate is 7.5% and write aconclusion. Year Machine A Machine B 1 12000 13100 2 14200 13900 3 16100 15800 4 19000 18600 5 21700 20000 6 22200 22800
The production department is proposing the purchase of an automatic insertion machine. It has identified 3 machines, each with an estimated life of 10 years. Which machine offers the best internal rate of return? Annual net cash flows Average investment Machine A only Machine B only Machine C only O Machines A and B Machine A $ 50,000 250,000 Machine B $ 40,000 300,000 Machine $ 75,000 500,000
KRP Company is considering a project that requires a machine. Cost of the machine is $250,000. Initial investment in net working capital is $55,500. Company spent amount of $4,200 to do analysis on this project to know the market status and paid $5,300 to get some information which is required to work on this project. What is the cash flow in Year 0 for this project? а. $250,000 b. $55,500 с. $315,000 d. $305,500
Your manager has asked you to advise your client Kofi Gyato, owner and director of Kofi Gyato Limited, on the implications of the proposed transaction.Your client has identified an opportunity to develop his business by manufacturing the products which he sells. To do this he would need to buy a machine which will have an expected life of ten years. He has received this quotation for the machine.GHȼPrice of machine70,000Delivery and installation3,500Commissioning costs1,500Annual maintenance costs3,500Required:Prepare a report to your client. Your report should:(a) Explain the difference between capital and revenue expenditure, and how each type of expenditure affects the accounts of a business.(b) Indicate which of the costs of the machine should be considered as capital cost and which should be considered as revenue cost.(c) Define depreciation and explain how the accounting entries for depreciation affect each element of the accounting equation.(d) Indicate:(i) What the annual…
Skatez n' co. is considering building a new plant. Gustav Jenkins, the company's marketing manager, is a supporter of the new plant. Charles Barles, the company's CFO is not sure they need a new plant. Currently, they purchase their skateboard blanks from china. The following figures were estimated for the new plant: cost of plant $6,000,000 Annual cash inflow $7,000,000 annual cash outflow $6,540,000 Estimated useful life of plant 15 years Salvage value of plant $3,000,000 Discount rate 11% Jenkins belives that this understates the value of the plant, claiming sales will be $400,000 higher than claimed, with insurance and warranty claim savings of $60,000 per year. He also believes the project is safter than above, at an 8% discount rate. What is the net present value of the project based on original projections? What if Jenkins estimated the $60,000 savings correctly, but the discount rate remains at 11%?