Reference no: EM132917840
The TechDesk Company produces and sells 5,500 modular computer desks per year at a selling price of $700 each. Its current production? equipment, purchased for $1,200,000 and with a? 5-year useful? life, is only 2 years old. It has a terminal disposal value of? $0 and is depreciated on a? straight-line basis. The equipment has a current disposal price of $500,000. ?However, the emergence of a new molding technology has led TechDesk to consider either upgrading or replacing the production equipment.
The following table presents data for the two? alternatives:
Upgrade Replace
One-time equipment costs $ 2,900,000.00 $ 4,000,000.00
Variable manufacturing cost per desk $145.00 $ 90.00
Remaining useful life of equipment (in years) 3 3
Terminal disposal value of equipment $ 0 $ 0
Problem 1: Should TechDesk upgrade its production line or replace? it? Show your calculations.
Problem 2: Now suppose the? one-time equipment cost to replace the production equipment is somewhat negotiable. All other data are as given previously. What is the maximum? one-time equipment cost that TechDesk would be willing to pay to replace rather than upgrade the old? equipment?
Problem 3: Assume that the capital expenditures to replace and upgrade the production equipment are as given in the original? exercise, but that the production and sales quantity is not known. For what production and sales quantity would TechDesk ?(a) upgrade the equipment or? (b) replace the? equipment?
Problem 4: Assume that all data are as given in the original exercise. Dan Doria is TechDesk?'s ?manager, and his bonus is based on operating income. Because he is likely to relocate after about a? year, his current bonus is his primary concern. Which alternative would Doria? choose? Explain.