Equipment should be replaced by full automatic equipment

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Reference no: EM131900672

Company X is tries to decide if the manually operated equipment should be replaced by full automatic equipment. You have the following information:

Current situation

• Two workers with the salary 20 000 USD per year per one worker.

• Maintenance cost is 10 000 USD per year

• Waste (e.g. defective work) is 12 000USD per year

• Economic lifetime of the machinery 10 years (investment was made 5 years ago)

• Salvage value is 0. (e.g. book value in 5 years, also market value is zero)

• Linear depreciation method (8 000 per year)

• Current market value if sold 24 000USD

• Tax rate 34% on EBT

New project

• Investment (new machinery) 120 000USD

• Two workers salary is saved

• Maintenance cost is 15 000USD

• Waste: 6 000USD per year

• Economic lifetime 5 years

• Linear depreciation method

• Book value = market value in five years. (both book and market values are 0)

• Required rate of return is 12%

If using excel, show formulas.

a) Prepare cash flow budget and evaluate the project based on net present value

b) Should the company replace the existing machinery?

Reference no: EM131900672

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