Posted: May 3rd, 2016
No trade-in was offered by the seller of the new machine. The following information has been assembled to help management decide which option is more desirable.
Old New
Machine Machine
Original cost of machine at acquisition……………………..$80,000 $120,000
Remaining useful life as of December 31, 2010…… 6yrs 6yrs
Expected annual cash operating expenses:
Variable cost per dozen……………………………… $.38 $.29
Total fixed costs…………………………………….. $21,000 $11,000
Assume that all operating revenues and expenses occur at the end of the year.
Required:
1. Use the net-present-value method to determine whether the ABC Company should retain the old machine or acquire the new machine. The organization’s hurdle rate is 16 percent.
2. Independent of your answer to requirement (1), suppose the quantitative differences are so small between the two alternatives that management is indifferent between the two proposals. Write a memo to the president of SPI that identifies and discusses any non-quantitative factors that management should consider.
Place an order in 3 easy steps. Takes less than 5 mins.