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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=$900. 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.

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=$900. 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.

Principles of Accounting Volume 2
Principles of Accounting Volume 2
19th Edition
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax
Chapter3: Cost-volume-profit Analysis
Section: Chapter Questions
Problem 8EB: Shonda & Shonda is a company that does land surveys and engineering consulting. They have an...
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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.
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