Reference no: EM131165595
Topic: Financial analysis accounting
Part -1:
Replacement of Office Equipment
Midwestern University is considering replacing some Xerox copiers with faster copiers purchased for from Brother. The administration is very concerned about the rising costs of operations during the last decade.
To convert to Brother, two operators would have to be retrained. Required training and 5 remodeling would cost $3,500. Midwestern's three Xerox machine were purchased for $8000 each, 5 years ago.
Their expected life was 15 years. Their resale value now is $1,750 each and will more years.
The total cost of the new Brother equipment will be $60,000; it will have zero disposal value in 10 years.
The three Xerox operators are paid $12 an hour each. They usually work a 40-hour week, Machine breakdowns occur monthly on each machine, resulting in repair costs of $75 per month and overtime of 6 hours, at time-and-one-half, per machine per month, to complete the normal monthly workload.
Toner, supplies, and so on, cost $50 a month for each Xerox copier.
The Brother system will require only two regular operators, on a regular work week of 40 hours each, to do the same work. Rates are $14 an hour, and no overtime is expected. Toner, supplies, and so on, will cost a total of $4,500 annually. Maintenance and repairs are fully serviced by Brother for $600 annually. (Assume a 52-week year.)
1. Using DCF techniques, compute the PV of all relevant cash flows, under both alternatives for the 10-year period discounted at 14%. As a nonprofit university, Midwestern does not pay' income taxes.
2. Should Midwestern keep the Xerox copiers or replace them if the decision is based solely on the given data?
3. What other considerations might affect the decision?
Part -2:
Suppose that mitsubishi Chemical Corporation is planning to buy new equipment to expand its production of a popular solvent. Estimated data are as follows (monetary amounts are in thousands of japanese yen);
Cash cost of new equipment now ¥400,000
Estimated life in year ¥10
Terminal salvage value ¥50,000
Incremental revennues per year ¥330,000
Incremental revennues per year other than depreciation ¥165,000
Assume a 60% flat rate that for income taxes. The company recevies all revenues and pays all expense other than depreciation in cash. Use a 14% discount rate. Assume that the company uses ordinary straight line depreciation based on a 10 -year recovery period for tax purposes. Also assume that the company depreciation the original cost less the terminal salvage value.
Compute the following:
1. Anticipated net income per year
2. Annual net cash Clow
3. Payback period
4. ARR On initial investment
5. NPV
Depreciation expense per year(less than terminal salvage value) 400,000/10 = 40,000
50,000/10 = 5,000, 40,000 - 5,000 = 35,000 expense per year.
Anticipated net income = Revenue - Expenses - depreciation- taxes, taxes = annual cash flow *.6, 330,000 - 165,000 - 35,000 = 130,000 130,000*.06 = 78,000, 130,000 - 78,000 = 52,000
Annual Net Cash Flow, Depreciation does not play a part in cash flow (Horgren, Sundem, Burgstahler, and Schatzber, 2014, p. 455). Revenue - Expenses, 330,000 - 165,000 = 165,000. Post tax cash flow 330,000 - 330,000*.6 = 66,000
Payback Period = initial incremental amount invested (400,000) / equal annual incremental cash inflow from operations(post tax 66,000) = 6.1 years
Accounting Rate of Return = (average annual incremental net cash inflow from operations - average incremental annual depreciation) / initial required investment (165,000 - 35,000) / 400,000 = 32.5%
Using Appendix B, 14% discount for 10 years yields .8772, .8772* 66,000 + previous years for 10 years =344275.89, subtract initial outlay 400,000 = (55724.11)
Horgren, C., Sundem, G., Burgstahler, D., and Schatzberg, J. (2014). Introduction to Management Accounting, Sixteenth Edition. In Central Michigan University's MSA 602 Financial Analysis, Planning, and Control. Pearson Learning Solutions.: Boston, MA.
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