Reference no: EM132859053
Question 1: The updated report needs to explain how Annual worth, Present worth and Internal Rate of Return (IRR) are used in capital investment decisions. A manufacturing process can be designed for varying degrees of automation/ capacity with different costs of operations, energy consumption and service requirements including warranties. Generally, with higher costs the expected benefits are also higher. However, comparison of alternatives are not easy due to different expected life and cost parameters associated with each alternative. The following is relevant cost information table for a simple analysis:
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Alternatives
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Cost for procurement & installation
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Annual Labour Cost
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Annual Power and Maintenance Cost
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A B C
D
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Organisations generally have a contract/ demand to supply certain number of units per year with a contract sale price of certain value per unit. You need to apply appropriate tools to determine the best option after-tax analyses using a tax rate of 25% and a minimum acceptable after-tax rate of return of 10% and straight-line depreciation of the asset for at least three alternatives. You need to consider expected life of each alternative and salvage value, if any after end of the life. Use each of the following methods for recommending the best option:
(a) Annual worth.
(b) Present worth.
(c) Internal Rate of Return (IRR).
Use excel for analysis and attach file as embedded file in word document/ upload file in Moodle for your analysis.
The updated report needs to explain Conventional and modified Benefit to Cost ratios and how these are used in capital investment decisions on two alternative machines, producing the same product, but one will produce higher quality items which can be expected to return greater revenue.
Given the following data table, populate relevant data from your organisation/ proposed organisation for any asset for the organisation which alternative option is better. Use the B/C method, a study period of expected life, and a Minimum Acceptable Rate of Return (MARR) of 25%.
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Alternative A
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Alternative B
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Procurement and installation cost:
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25,000
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30,000
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Salvage value:
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2,000
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1,000
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Annual receipts/ revenues/cost savings:
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12,000
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15,000
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Annual disbursements/ costs:
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1,100
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1,400
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Life:
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15
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15
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Determine the B/C values for each machine by using both the conventional and the modified formulations.
Use excel and attach file as embedded file in word document/ upload file in Moodle for your analysis.
Question 2: Your company has to obtain some new production equipment to be used for the next ten years, and leasing is being considered. You have been directed to perform an after-tax study of the leasing approach. The data information for the study is as follows:
Lease cost: First year, $110,000; second & third year, $85,000; fourth through to ten years is
$65,000 per year. Assume that a 10-year contract has been offered by the lessor that fixes these costs over the 10-year period. Other costs (outside the contract) are $4,500 per year. The effective income tax rate is 40%.
1- Develop the Annual After-tax Cash Flow (ATCF's) for the leasing alternative.
2- If the Minimum Attractive Rate of Return (MARR) after taxes is 10%, what is the equivelant annual cost for the leasing alternative?
Question 3: Machine X has been used for 12 years and currently has a book value of $37,500. A decision must be made concerning the most economic action to take: keep X, replace X with Y or replace X with Z. A before-tax analysis is to be performed.
If machine X is continued in service, it can be used for another 12 years and scrapped at zero value. Annual operating and maintenance costs will equal to $75,000.
If machine X is replaced with machine Y, a trade-in allowance of $22,500 will be provided for X. The original purchase price for Y, excluding the trade-in allowance, is $175,000. At the end of the 12 year planning horizon, Y will have a salvage value of $20,000. Annual operating and maintenance costs will total $55,000.
If machine X is replaced with machine Z, no trade-in allowance will be provided for X. The purchase price for Z is $185,000. At the end of the 12-year planning horizon, Z will have a salvage value of $40,000. Annual operating and maintenance costs will total $47,500.
Using a MARR of 10% and a before-tax analysis, determine the preferred course of action.
Use excef l or analysistacnhd failte as e mbedded file in word document/ upload file in Moodle
for your analysis.
Question 4: XYZ Company is considering replacing a machine.
The new improved machine will cost $16,500 including installation; it will have an estimated service life of 8 years and $2,000 salvage value. It is estimated that operating costs will average $1,550 per year. The present machine was purchased for $18,500 four years ago, and is estimated to have 8 more years of service life, at the end of which its salvage value will be $2,500. Operating costs of the present machine are $2,000 per year. If replaced now, it can be sold for $4,500.
Using a MARR of 15% and present value analysis, determine whether to replace the existing machine on economic grounds.
Use excel for analysis and attach file as embedded file in word document/ upload file in Moodle for your analysis.
Attachment:- Questions.rar