Reference no: EM131796329
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 The equipment the Production Department is currently utilizing is currently outdated and has become costly to maintain. New machines would also provide increased efficiences leading to increased sales. Due to this, the department is considering replacing all equipment with new machines. Given the financial information listed below, provide the following:
- An excel worksheet showing the annual cash flows by line-item and in total for the keep vs. purchase decision, for 8 years.
- Calculate the NPV in excel
- Calculate the IRR in excel
- Should the Department purchase new equipment or maintain the current equipment? Briefly explain why.
Data Information:
- Cost of current machines: $700,000
- Cost of new machines: $1,000,000
- Annual Maintenance on current machines: $75,000
- Annual Maintenance on new machines: $12,000
- Salvage value of current machines: $250,000
- Immediate employee training cost on new machines: $5,000
- Increased sales opportunity provided by new machines: $200,000 first year and growing at 5% per year after
- Company's required rate of return: 12%
- Contribution margin: 45%
- Depreciation and income taxes should be ignored