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Required information The following information applies to the questions displayed below.] The management of Devine Instrument Company is considering the purchase of a new drilling 1010K. According to the specifications and testing results, RoboDril will substantially increase p X10, the machine Devine is currently using. The AccuDril was acquired 8 years ago for $120,000 and is being depreciated using the straig year expected life and an estimated salvage value of $20,000. The engineering department ex

Required information The following information applies to the questions displayed below.] The management of Devine Instrument Company is considering the purchase of a new drilling 1010K. According to the specifications and testing results, RoboDril will substantially increase p X10, the machine Devine is currently using. The AccuDril was acquired 8 years ago for $120,000 and is being depreciated using the straig year expected life and an estimated salvage value of $20,000. The engineering department ex

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Required information [The following information applies to the questions displayed below.] The management of Devine Instrument Company is considering the purchase of a new drilling machine, model RoboDril 1010K. According to the specifications and testing results, RoboDril will substantially increase productivity over AccuDril X10, the machine Devine is currently using. The AccuDril was acquired 8 years ago for $120,000 and is being depreciated using the straight-line method over a 10- year expected life and an estimated salvage value of $20,000. The engineering department expects the AccuDril to keep going for another 3 years after a major overhaul at the end of its expected useful life. The estimated cost for the overhaul is $100,000. The overhauled machine will be depreciated using straight-line depreciation with no salvage value. The overhaul will improve the machine's operating efficiency approximately 20% for each of years 3, 4, and 5. No other operating conditions will be affected by the overhaul. RoboDril 1010K is selling for $250,000. Installing, testing, rearranging, and training will cost another $30,000. The manufacturer is willing to take the AccuDril as a trade-in for $40,000. The RoboDril will be depreciated using the straight- line method with no salvage value. New technology most likely will make RoboDril obsolete to the firm in 5 years. ences Variable operating cost for either machine is the same: $10 per machine hour (cash-based). Other pertinent data follow: AccuDril X10 RoboDril 1010K Units of output (per year) Machine hours 10,000 8,000 100 10,000 4,000 100 $4 $ Selling price per unit Variable manufacturing cost-cash-based (not including machine hours) Other annual expenses (tooling and supervising) Disposal value-today Disposal value-in 5 years 2$ $55,000 40 40 $95,000 $25,000 $. $50,000 Devine Instrument Company's weighted-average cost of capital (WACC) is 12%, and it is in the 40% tax bracket. Use the PV factors (Appendix C, Table 1) for calculating the NPV of each decision alternative. Required: <Prev 4 of 4 Next > aw cation ... %24
Transcribed Image Text:Required information [The following information applies to the questions displayed below.] The management of Devine Instrument Company is considering the purchase of a new drilling machine, model RoboDril 1010K. According to the specifications and testing results, RoboDril will substantially increase productivity over AccuDril X10, the machine Devine is currently using. The AccuDril was acquired 8 years ago for $120,000 and is being depreciated using the straight-line method over a 10- year expected life and an estimated salvage value of $20,000. The engineering department expects the AccuDril to keep going for another 3 years after a major overhaul at the end of its expected useful life. The estimated cost for the overhaul is $100,000. The overhauled machine will be depreciated using straight-line depreciation with no salvage value. The overhaul will improve the machine's operating efficiency approximately 20% for each of years 3, 4, and 5. No other operating conditions will be affected by the overhaul. RoboDril 1010K is selling for $250,000. Installing, testing, rearranging, and training will cost another $30,000. The manufacturer is willing to take the AccuDril as a trade-in for $40,000. The RoboDril will be depreciated using the straight- line method with no salvage value. New technology most likely will make RoboDril obsolete to the firm in 5 years. ences Variable operating cost for either machine is the same: $10 per machine hour (cash-based). Other pertinent data follow: AccuDril X10 RoboDril 1010K Units of output (per year) Machine hours 10,000 8,000 100 10,000 4,000 100 $4 $ Selling price per unit Variable manufacturing cost-cash-based (not including machine hours) Other annual expenses (tooling and supervising) Disposal value-today Disposal value-in 5 years 2$ $55,000 40 40 $95,000 $25,000 $. $50,000 Devine Instrument Company's weighted-average cost of capital (WACC) is 12%, and it is in the 40% tax bracket. Use the PV factors (Appendix C, Table 1) for calculating the NPV of each decision alternative. Required: <Prev 4 of 4 Next > aw cation ... %24
welve Homework i Saved Help Save & Exit Submit Check my work Required: 1. Determine for each of years 0 though 5 (inclusive) the after-tax cash flows for items that differ between the two alternatives. 2. Compute the payback period (in years) for purchasing RoboDril 1010K rather than ving AccuDril X10 overhauled in 2 years. Assume for this calculation only that all cash flows (other than those related to the ne. acquisition cost of the replacement asset)- including tax effects-occur evenly throughout the 3. Using results generated in requirement 1, what is the present value of each decision alternative, keep vs. replace? year. Complete this question by entering your answers in the tabs below. Req 1 and 3 Req 2 1. Determine for each of years 0 though 5 (inclusive) the after-tax cash flows for items that differ between the two alternatives. (Express all cash-flow amounts in thousai individual amounts to 1 decimal place. Negative amounts should be indicated by a minus sign.) 3. Using results generated in requirement 1, what is the present value of each decision alternative, keep vs. replace? (Use the built-in NPV function in Excel to calculate pi cash flows in thousands (000s); round your answers to 1 decimal place. Negative amounts should be indicated by a minus sign.) After-tax Cash Flows PV of Net Cash Outflows 1 3 Overhaul AccuDril After-tax cash operating cost $ 52.8 Overhaul cost (capitalized) Tax savings on depreciation (straight-line method) Other cash expenses, after tax After-tax cash flows Total PV Buy RoboDril 1010k Net equipment purchase After-tax cash operating cost < Prev 4 of 4 Next > %24
Transcribed Image Text:welve Homework i Saved Help Save & Exit Submit Check my work Required: 1. Determine for each of years 0 though 5 (inclusive) the after-tax cash flows for items that differ between the two alternatives. 2. Compute the payback period (in years) for purchasing RoboDril 1010K rather than ving AccuDril X10 overhauled in 2 years. Assume for this calculation only that all cash flows (other than those related to the ne. acquisition cost of the replacement asset)- including tax effects-occur evenly throughout the 3. Using results generated in requirement 1, what is the present value of each decision alternative, keep vs. replace? year. Complete this question by entering your answers in the tabs below. Req 1 and 3 Req 2 1. Determine for each of years 0 though 5 (inclusive) the after-tax cash flows for items that differ between the two alternatives. (Express all cash-flow amounts in thousai individual amounts to 1 decimal place. Negative amounts should be indicated by a minus sign.) 3. Using results generated in requirement 1, what is the present value of each decision alternative, keep vs. replace? (Use the built-in NPV function in Excel to calculate pi cash flows in thousands (000s); round your answers to 1 decimal place. Negative amounts should be indicated by a minus sign.) After-tax Cash Flows PV of Net Cash Outflows 1 3 Overhaul AccuDril After-tax cash operating cost $ 52.8 Overhaul cost (capitalized) Tax savings on depreciation (straight-line method) Other cash expenses, after tax After-tax cash flows Total PV Buy RoboDril 1010k Net equipment purchase After-tax cash operating cost < Prev 4 of 4 Next > %24
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