(Ignore income taxes in this problem.) Blaine Corporation is considering replacing a technologically obsolete machine with a new
state-of-the-art numerically controlled machine. The new machine would cost $180,000 and would have a ten-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $12,000 per year to operate and maintain, but would save $48,000 per year in labor and other costs. The old machine can be sold now for scrap for $20,000. What is the simple rate of return on the new machine (round off your answer to the nearest one-hundredth of a percent)? Select one:
1) 10.00%2) 26.67%3) 22.50%4) 11.25%show work please
1) 10.00%2) 26.67%3) 22.50%4) 11.25%show work please
1 answer:
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Answer:
It should replace the old machine. In the current accounting period.
Explanation:
We need to perform a relevant cost analysis:
Keep the machine:
F0 = $0
F1 = $1500 maintenance
F2 = $3,000 maintenance
F3 = $6,000 maintenance
F4 = $12,000 maintenance
F5 =$24,000 maintenance + 250 resale value
replace the machine:
F0 = -12,000 purchase + 4,000 sale of old machine = -800
F1 = $900 maintenance
F2 = $900 maintenance
F3 = $900 maintenance
F4 = $900 maintenance
F5 =$900 maintenance + 1,500 resale value
As revenues are the same for each machine, we ignore them. We will only focus on the cost each machine generate:
We solve for the present worth of each machine with a discount rate of 12%
As the present worth of the new machine is lower, the best decision for the company is to purchase the new machine and sale the old machine.
Delaying this will incur in higher maintenance cost (1,500 - 900)
and a lower recovery value (4,000 - 2,000)
As there is no cost saving for delaying the purchase, it should be made immediately.