Strategic capital investment decisions

Assignment Help Accounting Basics
Reference no: EM13151578

Smith Electronics manufactures portable CD players. Lillian Perez, the VP of operations at Smith Electronics, is considering a major capital investment decision. It would cost $2,500,000 to put new, highly automated machines in the factory. The equipment would last about 15 years and would have no salvage value at the end of that period. The equipment will replace 10 workers, saving Smith $300,000 per year in direct labor. Operation and maintenance costs on the machines are expected to cost $100,000 per year. The automated equipment is expected to improve quality. Smith's main competitors are installing similar equipment. If Smith installs the equipment, its revenues are expected to remain steady. If Smith chooses not to install new equipment, its contribution margins expected to fall by $200,000 per year as a result of lower quality compared to its competitors. Smith's discount rate is 10% and its tax rate is 30%.

A. How much is Smith expected to save each year if it installs the equipment (including tax effects)?

B. How much will Smith lose each year if it does not install the equipment (including tax effects)?

C. Explain how you would analyze this problem in order to determine if Smith should purchase the new machines.

D. Should Smith purchase the new machine?

E. Assume that programming and maintenance costs turn out to be much higher than Lillian's estimates. However, despite the fact that the automation equipment increased costs, Lillian still wants to continue with the project Explain why Lillian might not want to scrap the equipment.

Reference no: EM13151578

Questions Cloud

Sales method of accounting acceptable : The Abbott Corporation sells merchandise on the installment basis, and the uncertainties of cash collection make the use of the installment sales method of accounting acceptable. The following data relate to two years of operations.
What is the molarity of the ethanol : A solution of ethanol (C2H5OH) in water is prepared by dissolving 69.8 mL of ethanol (density = 0.79 g/cm3) in enough water to make 250.0 mL of solution. What is the molarity of the ethanol in this solution?
Explain intermolecular attractive forces : nonbonding domains, polarity, intermolecular attractive forces, and which IMAF is the most important
What is difference between a homokaryon and a heterokaryon : If normal cells were isolated many years ago and have been maintained in the lab through subculturing, would you expect this cell line now to be normal or transformed? why?
Strategic capital investment decisions : Smith Electronics manufactures portable CD players. Lillian Perez, the VP of operations at Smith Electronics, is considering a major capital investment decision.
Draw the production possibility frontier : Draw the production possibility frontier for the Home country with cloth on the horizontal axis and food on the vertical axis. Suppose the economy is engaged in free trade and the free trade relative price of cloth is given.
What volume will the gas occupy : a gas has a volume of 590mL at a temperature of -55.0 C. what volume will the gas occupy at 30.0C?
Determine various information concerning consumer behavior : A sample of 500 respondents was selected in a large metropolitan area to determine various information concerning consumer behavior, Among the questions asked was "Do you enjoy shopping for clothing?
Calculate population mean fitness : What is the genotypic-specific survivorship for this population?

Reviews

Write a Review

 

Accounting Basics Questions & Answers

  Prepare the entry to establish the fund

Gannon uses the perpetual system in accounting for merchandise inventory. Prepare (1) the September 9 entry to establish the fund and (2) the September 30 entry to both reimburse the fund and reduce it to $300.

  Describe the research design

Assume you are the decision maker for IndustryWeek. Given the declining value of the reader response card to subscribers, originally designed as a value-enhancing service to IW readers and advertisers alike, what further research might be suggeste..

  Journal entries for preferred and common stocks

Common and preferred stock? issuances and dividends. Flameco Corp. was incorporated on January 1, 2003, and issued the following stock, for cash:

  Purple corporation after the property distribution

What is the E&P of Purple Corporation after the property distribution?

  Terminology of the accounting process or financial reporting

Specifically, you are making a presentation about your role as an accountant. Describe for the students the primary objectives of accounting. a) Explain the basic terminology of the accounting process or financial reporting.

  Statements regarding the taxation of c corporation

Which of the following statements is correct regarding the taxation of C corporation?

  Computing the tax liability

In 2010, Athena reported $35000 of taxable income. Of this, $30000 came from her work at the local library and the remaining $5000 was from capital gains to be taxed at preferential rates. Compute her tax liability for 2010 as a single taxpayer.

  Journal entry of building purchase-magazine subscription

A company buys a building with an appraised value of $100,000 for $30,000 cash and the assumption of a 25 year, 10% mortgage with a balance of $60,000

  Withdrew the accumulated amount of money

Lyle O 'Keefe invests $30,000 at 8% annual interest, leaving the money invested without withdrawing any of the interest for 8 years. At the end of the 8 years, Lyle withdrew the accumulated amount of money.

  Flood damage in the brush creek area

Flood damage in the Brush Creek area averages $7,000 annually. Civil engineers with floodplain expertise have designed a series of small dams to restrain the flow. They will cost $25,000 and will involve annual maintenance charges of $500.

  Is the machine an acceptable investment

edward company's required rate of return is 15%. the company can purchase a new machine at cost 40,350/. the new machine would generate cash inflows of 15,000 per year and have a four-year life with no salvage value. compute the machine's net pres..

  Evaluating the two bids

If you were a member of the School District board, what factors would you consider in evaluating the two bids?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd