Received production contract for new product

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Reference no: EM131524264

Metallic Peripherals, Inc. has received a production contract for a new product. The contract lasts for 5 years. To do the necessary machining operations, the firm can use its own CNC mill, which was purchased 3 years ago at a cost of $350,000. Today the CNC mill can be sold for $28,000. In 5 years the CNC will have a $12,000 salvage value. Annual O&M costs for the CNC are $16,000/year. If the firm uses its own CNC mill it must also purchase an additional one at a cost of $240.000, its value in 5 years will be $40,000. The new lathe O&M costs are $7, 500/year. As an alternative, the presently owned CNC mill can be traded in for $50,000 and a new CNC mill of larger capacity purchased for a cost of $400,000; its value in 5 years is estimated to be $90,000, and its annual O&M costs $9,000/year. The new machine will be acquired with 40% company's own money and the rest financed with a loan to be repaid in 5 equal total annual payments at a rate of 6%. All the CNC mills are MACRS-CJDS 5-year property class, the company has a 40% tax rate, and uses a 12% MARR. Clearly show the ATCF profile for each alternative

a) Using an EUAC comparison, a planning horizon of 5 years, and the insider cash flow approach, decide which is the more favorable alternative.

b) Using an EUAC, the insider approach, and assuming that Section 1031 like-kind property exchange is used, determine the more favorable alternative.

Reference no: EM131524264

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