Assume Urgent Care paid $42,000 for X-ray equipment four years ago. The equipment was expected to have a useful life of 10 years from the date of acquisition with annual operating costs of $25,000. Technological advances have made the machine purchased four years ago obsolete with a zero salvage value. An improved X-ray device incorporating the new technology is available at an initial cost of $50,000 and annual operating costs of $15,000. The new machine is expected to last only six years before it, too, is obsolete. Asked to analyze the financial aspects of replacing the obsolete but still functional machine, an Urgent Care accountant prepared the following analysis. After looking over these numbers, the company's manager rejected the proposal. Perform an analysis of relevant costs to determine whether the manager made the correct decision. Cost of new machine Advantage (disadvantage) of replacement. . 50,000) 15$15, 200 Six-year savings [($25,000 - $15,000) x 6] Cost of new machine .... Undepreciated cost of old machine [($42,000/10) × 6]. Advantage (disadvantage) of replacement.. $ 60,000 (50,000) 25,200 $ 15,200

Assume Urgent Care paid $42,000 for X-ray equipment four years ago. The equipment was expected to have a useful life of 10 years from the date of acquisition with annual operating costs of $25,000. Technological advances have made the machine purchased four years ago obsolete with a zero salvage value. An improved X-ray device incorporating the new technology is available at an initial cost of $50,000 and annual operating costs of $15,000. The new machine is expected to last only six years before it, too, is obsolete. Asked to analyze the financial aspects of replacing the obsolete but still functional machine, an Urgent Care accountant prepared the following analysis. After looking over these numbers, the company's manager rejected the proposal. Perform an analysis of relevant costs to determine whether the manager made the correct decision. Cost of new machine Advantage (disadvantage) of replacement. . 50,000) 15$15, 200 Six-year savings [($25,000 - $15,000) x 6] Cost of new machine .... Undepreciated cost of old machine [($42,000/10) × 6]. Advantage (disadvantage) of replacement.. $ 60,000 (50,000) 25,200 $ 15,200

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter12: Capital Investment Decisions

Section: Chapter Questions

Problem 51P: Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new...

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Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new design will eliminate the production of a toxic solid residue. The initial cost of the system is estimated at 860,000 and includes computerized equipment, software, and installation. There is no expected salvage value. The new system has a useful life of 8 years and is projected to produce cash operating savings of 225,000 per year over the old system (reducing labor costs and costs of processing and disposing of toxic waste). The cost of capital is 16%. Required: 1. Compute the NPV of the new system. 2. One year after implementation, the internal audit staff noted the following about the new system: (1) the cost of acquiring the system was 60,000 more than expected due to higher installation costs, and (2) the annual cost savings were 20,000 less than expected because more labor cost was needed than anticipated. Using the changes in expected costs and benefits, compute the NPV as if this information had been available one year ago. Did the company make the right decision? 3. CONCEPTUAL CONNECTION Upon reporting the results mentioned in the postaudit, the marketing manager responded in a memo to the internal audit department indicating that cash inflows also had increased by a net of 60,000 per year because of increased purchases by environmentally sensitive customers. Describe the effect that this has on the analysis in Requirement 2. 4. CONCEPTUAL CONNECTION Why is a postaudit beneficial to a firm?
Duluth Medico purchased a digital imageprocessing machine three years ago at a cost of$50,000. The machine had an expected life of eightyears at the time of purchase and an expected salvagevalue of $5,000 at the end of the eight years. Theold machine has been slow at handling the increasedbusiness volume, so management is consideringreplacing the machine. A new machine can be purchased for $75,000, including installation costs.Over its five-year life, the machine will reduce cashoperating expenses by $30,000 per year. Sales arenot expected to change. At the end of its useful life,the machine is estimated to be worthless. The oldmachine can be sold today for $10,000. The firm’sinterest rate for project justification is known to be15%. The firm does not expect a better machine(other than the current challenger) to be available forthe next five years. Assuming that the economic service life of the new machine, as well as the remaininguseful life of the old machine, is five years,(a)…
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A firm is considering replacing a machine that has been used for making a certain kind of packaging material. The new machine will cost $31,000 and will have an estimated economic life of 10 years with a salvage value of $2,500. Operating costs are expected to be $1,000 per year throughout its service life. The machine currently in use had an original cost of $25,000 four years ago, and its service life (physical life) at the time of purchase was estimated to be seven years with a salvage value of $5,000. This machine has a current market value of $7,700. If the firm retains the old machine, its updated market values and operating costs for the next four years will be as follows: The firm's minimum attractive rate of return is 12%.(a) Working with the updated estimates of market values and operating costs over the next four years, determine the remaining useful life of the old machine.(b) Determine whether it is economical to make the replacement now.(c) If the firm's decision in part…
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