Everest has also found that after only two years of using a

Assignment Help Financial Management

Reference no: EM13374325

Everest has also found that, after only two years of using a machine for a semi-automatic process, a more advanced model has arrived on the market. This advanced model will not only produce the current volume of the company's product more efficiently, but allow increased output of the product. The existing machine had cost $320,000 and was being depreciated over a ten-year period, at the end of which it would be scrapped. The market value of this machine is currently $150,000 and there is a prospective purchaser interested in acquiring it.

The advanced model now available costs $1,235,000 fully Stalled. Because of its more complex mechanism, the advanced model is expected to have a useful life of only eight years. A scrap value of $205,000 is considered reasonable after 8 years.

A comparison of the existing and advanced model now available shows the following:

	Existing Machine	Advanced Machine
Capacity	200,000 units	230,000 units
Selling price per unit	$9.50	$9.50
Production costs per unit
Labour	$1.20	$0.80
Materials	$4.80	$4.60
Fixed overhead	$2.50	$1.60

The sales are expected to be 200,000 units every year for the next 8 years. Because of the advanced nature of material, working capital investment would decrease by $100,000 at the current time. The production costs are based on a production of 200,000 units a year. The tax rate for the company is 20%.

The required rate of return is estimated as 15%. Evaluate the proposal to purchase advanced machine by:

(a) Calculating the payback period if advanced machine is purchased.

(b) Calculating the net present value if advanced machine is purchased.

(d) Explaining whether the advanced machine should be purchased. What other considerations arc relevant for your decision?

Reference no: EM13374325

Questions Cloud

Metal a was determined to be 95extracted into methylene : metal a was determined to be 95extracted into methylene chloride with dethizone at ph6 when equal volumes of aqueous

The caraway seed company sells specialty gardening seeds : the caraway seed company sells specialty gardening seeds and products primarily to mail-order and internet customers.

On 1 march 2013 zentique inc reported its financial results : on 1 march 2013 zentique inc. reported its financial results an extract of the 2012 balance sheet is shown belowin

Case studykoda private limited koda a privately owned : case studykoda private limited koda a privately owned company has been manufacturing electrical parts used in mobility

Everest has also found that after only two years of using a : everest has also found that after only two years of using a machine for a semi-automatic process a more advanced model

Case studyyou are the chief accountant of everest : case studyyou are the chief accountant of everest manufacturers. everest manufactures a wide range of building and

Question 1 nbspdemand elasticity commuters in a : question 1 nbspdemand elasticity commuters in a medium-sized city can travel either by automobile or by bus. the demand

Question 1compare the applications of bluetooth with those : question 1compare the applications of bluetooth with those of ieee 802.11?question 2what are the benefits on bluetooth

How do you compare the burial rites in greek society to : how do you compare the burial rites in greek society to antigone? give 3 examples and explain with references from the

User Account

All Pages