Homework Help is Here – Start Your Trial Now!
Business
Accounting
duction levels and thus more revenues immedia han the manual machine. The manual machine c has limited energy and maintenance costs, so it Che expected revenues of the automatic machine

duction levels and thus more revenues immedia han the manual machine. The manual machine c has limited energy and maintenance costs, so it Che expected revenues of the automatic machine

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
See similar textbooks
icon
Related questions
Question

Please dont copy from chegg. Show work and formulas, please

Question 5 An automobile parts manufacturer is considering whether they should invest in an automatic or manually operated machinery. Both alternatives will have initial cost of $5,000. The automatic machine allows for higher production levels and thus more revenues immediately, however more maintenance costs over time than the manual machine. The manual machine does not produce as many door panels initially but has limited energy and maintenance costs, so its net revenues are reasonably steady over time. The expected revenues of the automatic machine are $2,900 per year for the next 4 years. The operating and maintenance cost will cost $200 now and will increase by $700 per year. For example, the operating cost in the second year is 200+700=S900. The expected net revenues (taking into account salaries and energy cost) for the manual machine are $1,500 for the first year and S1,600, $1,750, and $1,850 for years 2-4, respectively. 1. Calculate the Internal Rate of Return of each alternative. 2. Knowing the MARR is 8%, use NPW analysis to compare these alternatives and find out which one is better. 3. Calculate the benefit cost ratio for both alternatives. 4. You re now required to compare those two alternatives using incremental IRR analysis. Conduct this analysis noting that for proper conclusions the incremental cash flow diagram needs to reflect an investment (pay now and achieve revenues later). Think carefully as to whether the increment, from mathematical perspective, needs to be from Manual →Auto or Auto Manual.
Transcribed Image Text:Question 5 An automobile parts manufacturer is considering whether they should invest in an automatic or manually operated machinery. Both alternatives will have initial cost of $5,000. The automatic machine allows for higher production levels and thus more revenues immediately, however more maintenance costs over time than the manual machine. The manual machine does not produce as many door panels initially but has limited energy and maintenance costs, so its net revenues are reasonably steady over time. The expected revenues of the automatic machine are $2,900 per year for the next 4 years. The operating and maintenance cost will cost $200 now and will increase by $700 per year. For example, the operating cost in the second year is 200+700=S900. The expected net revenues (taking into account salaries and energy cost) for the manual machine are $1,500 for the first year and S1,600, $1,750, and $1,850 for years 2-4, respectively. 1. Calculate the Internal Rate of Return of each alternative. 2. Knowing the MARR is 8%, use NPW analysis to compare these alternatives and find out which one is better. 3. Calculate the benefit cost ratio for both alternatives. 4. You re now required to compare those two alternatives using incremental IRR analysis. Conduct this analysis noting that for proper conclusions the incremental cash flow diagram needs to reflect an investment (pay now and achieve revenues later). Think carefully as to whether the increment, from mathematical perspective, needs to be from Manual →Auto or Auto Manual.
Expert Solution
steps

Step by step

Solved in 2 steps with 4 images

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education
SEE MORE TEXTBOOKS