The company are considering selling their old machine that has a capital cost of £260 000 and replacing it with an up-to-date model costing £220 000. For immediate purchase the company will receive £120 000-part exchange allowance. Both the current and new machines are able to meet the expected company demand, estimated at: Year Units 1 90 000 2 50 000 3 30 000 After three years, it is predicted that demand will be zero due to the technological developments in the industry. The following data has been provided for the existing and new machine: Current Machine £ per unit New Machine £ per unit Direct Materials 1.80 1.80 Direct Labour 0.75 0.60 Variable Overheads 0.45 0.30 Depreciation 0.35 0.55 Additional information The selling price for each component is £5.00 and this will remain constant for the next three years. The company expect the cost of direct materials and direct labour to increase by 5% each year. The company predicts that repair and maintenance costs for the current machine will be £7000 per annum. The current machine is expected to have a zero-residual value at the end of year 3. The company predicts that repair and maintenance costs for the new machine will be £1000 per annum. The new machine is expected to have a £75 000 residual value at the end of year 3. The company’s cost of capital is 15% Extract from the present value table for £1 at 15% Year Units 1 0.870 2 0.756 3 0.658 4 0.572 Pietro would like you to produce a business report that can be given to the company offering advice on the best course of action for the purchase / replacement machine. REQUIRED Prepare a report that evaluates the capital expenditure proposals using appropriate financial techniques.
The company are considering selling their old machine that has a capital cost of £260 000 and replacing it with an up-to-date model costing £220 000. For immediate purchase the company will receive £120 000-part exchange allowance. Both the current and new machines are able to meet the expected company demand, estimated at: Year Units 1 90 000 2 50 000 3 30 000 After three years, it is predicted that demand will be zero due to the technological developments in the industry. The following data has been provided for the existing and new machine: Current Machine £ per unit New Machine £ per unit Direct Materials 1.80 1.80 Direct Labour 0.75 0.60 Variable Overheads 0.45 0.30 Depreciation 0.35 0.55 Additional information The selling price for each component is £5.00 and this will remain constant for the next three years. The company expect the cost of direct materials and direct labour to increase by 5% each year. The company predicts that repair and maintenance costs for the current machine will be £7000 per annum. The current machine is expected to have a zero-residual value at the end of year 3. The company predicts that repair and maintenance costs for the new machine will be £1000 per annum. The new machine is expected to have a £75 000 residual value at the end of year 3. The company’s cost of capital is 15% Extract from the present value table for £1 at 15% Year Units 1 0.870 2 0.756 3 0.658 4 0.572 Pietro would like you to produce a business report that can be given to the company offering advice on the best course of action for the purchase / replacement machine. REQUIRED Prepare a report that evaluates the capital expenditure proposals using appropriate financial techniques.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
The company are considering selling their old machine that has a capital cost of £260 000 and replacing it with an up-to-date model costing £220 000. For immediate purchase the company will receive £120 000-part exchange allowance.
Both the current and new machines are able to meet the expected company demand, estimated at:
|
Year |
Units |
|
1 |
90 000 |
|
2 |
50 000 |
|
3 |
30 000 |
After three years, it is predicted that demand will be zero due to the technological developments in the industry.
The following data has been provided for the existing and new machine:
|
|
Current Machine £ per unit |
New Machine £ per unit |
|
Direct Materials |
1.80 |
1.80 |
|
Direct Labour |
0.75 |
0.60 |
|
Variable Overheads |
0.45 |
0.30 |
|
|
0.35 |
0.55 |
Additional information
- The selling price for each component is £5.00 and this will remain constant for the next three years.
- The company expect the cost of direct materials and direct labour to increase by 5% each year.
- The company predicts that repair and maintenance costs for the current machine will be £7000 per annum.
- The current machine is expected to have a zero-residual value at the end of year 3.
- The company predicts that repair and maintenance costs for the new machine will be £1000 per annum.
- The new machine is expected to have a £75 000 residual value at the end of year 3.
The company’s cost of capital is 15%
Extract from the present value table for £1 at 15%
|
Year |
Units |
|
1 |
0.870 |
|
2 |
0.756 |
|
3 |
0.658 |
|
4 |
0.572 |
Pietro would like you to produce a business report that can be given to the company offering advice on the best course of action for the purchase / replacement machine.
REQUIRED
Prepare a report that evaluates the capital expenditure proposals using appropriate financial techniques.
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