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Ibrahim Asafi, the general manager of the Coronado Company, is contemplating replacing the existing assembly-line equipment in the Assembly Department with automated assembly equipment. Production output and revenues will be unaffected by the replacement decision. Transactions related to the capital investment are cash transactions that would occur today.
Existing Assembly Equipment
New Automated Assembly Equipment
Original cost
$1,100,000
$1,200,000
Useful life
11 years
5 years
Current age
6 years
0 years
Useful life remaining
Accumulated amortization
$600,000
$0
Book value
$500,000
Not acquired yet
Current disposal price (in cash)
$200,000
Terminal disposal price (in cash, in 5 years)
Average working capital needed
$120,000
$70,000
Current annual Assembly Department costs are as follow:
Direct materials
Direct manufacturing labour
400,000
Amortization
100,000
Maintenance and repairs
150,000
Other operating costs
50,000
Supervision (allocated as 10% of direct manufacturing labour costs)
40,000
Allocated rent (based on space used)
Allocate corporate overhead (based on direct manufacturing labour costs)
120,000
Total
$1,500,000
Additional Information
Coronado estimates a required rate of return of 12% for this project.
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