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
the total (ie. aggregated) cashflows in respect to operations, with details of annual cash inflows & annual outflows in respect to operations, the total (ie. aggregated) cashflo


Balance Sheet                                                                      2010                2011             Assets Cash

explain fully the concept of the cost.how does cost accounting contribute to the effective and efficent management of an industrial established?

Question Hornsby Manufacturing has four categories of overheads. The four categories and the expected overhead costs for each category for next year are as follows:

What is labor costing,what are the problems involved in labor costing

Candler Inc a computer software development firm has stock outstanding as follows: 40,000 shares of $2 nonparticipating, noncumulative preferred stock of $10 par, and 250,000 share

Define the concept of opportunity cost in your own words. Given an example from your own life of the opportunity cost of a decision (do NOT use classroom examples). Explain why o

Nieland Industries had one patent recorded on its books as of January 1, 2014. This patent had a book value of $288,000 and a remaining useful life of 8 years. During 2014, Nieland

REPORT ON SATYAM