Evaluate the acquisition of manufacturing equipment, Cost Accounting

Evaluate the Acquisition of Manufacturing Equipment

XYZ Limited is a medium sized company providing a range of medical solutions. You, the financial manager has been asked to evaluate the acquisition of new automated manufacturing equipment designed for fast, high quality production runs.

The key financial characteristics of the two proposed machines are summarized below.

Machine A:

This highly automated unit can be purchased for $830,000 and will require $40,000 in installation costs. It will be depreciated at 20% Diminishing Value over 5 years. At the end of 5 years the machine could be sold to net $400,000.

If this machine is acquired, it is anticipated that the following changes to working capital would result.

Cash                      + $ 25,000

Accounts receivable + $120,000

Inventories             - $ 20,000

Accounts payable    + $ 35,000

and will be recovered at end of year 5.

Machine B:

This unit is not as sophisticated as Machine A. It costs $640,000 and requires $20,000 in installation costs. It will be depreciated under Diminishing Value at 20% over 5 years. At the end of 5 years, it can be sold to net $330,000. Acquisition of this press will have no effect on the firm's net working capital position.

Additional Data:


XYZ estimates that its (cash) earnings for each option,(before depreciation and taxes) would be as follows:

Year Press A Press B

1 250,000 210,000

2 270,000 210,000

3 300,000 210,000

4 330,000 210,000

5 370,000 210,000

The XYZ's tax rate is 33% and from the 'market financial statements' you are provided the following information.

Market Value of Equity: $1.5 million

Market Value of Debt: $0.5 million

The shares are currently selling for $2.10 per share. The required return on equity is 15.87%. The most recent dividend was 27 cents per share. The debt is selling at a discount to its face value and carries a coupon rate of 10% and has a yield to maturity of 12.54%.

Required:

(a) Recommend by way of a written presentation to the Board of Directors which, if either, of the machines the company should acquire if XYZ has:

 (i) Unlimited funds, and

 (ii) Capital rationing - (i.e. a maximum amount to invest of $1.0 million)

Attach schedules of your calculations as an addendum to the report.

 NOTE: Treat the cash flows as occurring at the end of each year.

The gain/loss on sale of the presses may have tax implications which are to be treated as occurring at the end of year 5.

(b) What is the impact on your recommendation if the operating cash inflows associated with Machine A are characterized as very risky in contrast to the low risk operating cash inflows of Machine B.

Posted Date: 2/16/2013 12:45:12 AM | Location : United States







Related Discussions:- Evaluate the acquisition of manufacturing equipment, Assignment Help, Ask Question on Evaluate the acquisition of manufacturing equipment, Get Answer, Expert's Help, Evaluate the acquisition of manufacturing equipment Discussions

Write discussion on Evaluate the acquisition of manufacturing equipment
Your posts are moderated
Related Questions
CVP for Multiple Products What number of businesses sells only one manufactured goods? The reality is that firms usually give us the diverse product line, and the individual pr

Capital We have seen previous in this section that the fundamental accounting equality states as: Assets = liabilities + owners equity. From the illustration of balanc

Tracking Direct Materials Jack keeps full records of the material released to each job. When Donnie gathered up light bulbs, tape, breakers, wire, and wire nuts on the morning

A machine originally had an estimated useful life of 5 years, but after 3 complete years, it was decided that the original estimate of useful life should have been 10 years. At tha

Bull Bay Ltd. Manufacturers two types of surfboard, "Winner" and "Surf King", whose selling prices are $300 and $900 respectively. Each surfboard passes through two manufacturing d

what is the purpose of cost accounting and its nat ure?

A corporation acquired a truck on July 1, 2012, at a cost of $162,000. The truck has a six-year useful life and an estimated salvage value of $18,000. The straight-line method of d

Savage Distribution markets CDs of performing artist Little Sister.  At the beginning of October, Savage had in beginning inventory 1,200 Little Sister's CDs with a unit cost of $5

Prepare answers to each of the following questions.  Assume a tax rate of 30%. (i) Harry Ltd has a balance of prepaid rent in the balance sheet amounting to $100 000 as at 30 Ju

1. Suppose your company needs to raise $30 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 8 percent, and you're