Which system would the company choose? Old system 2. Repeat the net present value analysis of Requirement 1, using 12 percent as the discount rate. Old system $fill in the blank 4 New system $fill in the blank 5 3. Upon seeing the projected sales for the old system, the marketing manager commented: “Sales of 100,000 units per year cannot be maintained in the current competitive environment for more than one year unless we buy the automated system. The automated system will allow us to compete on the basis of quality and lead time. If we keep the old system, our sales will drop by 10,000 units per year.” Repeat the net present value analysis, using this new information and a 12 percent discount rate.
Capital Investment, Discount Rates, Intangible and Indirect Benefits, Time Horizon, Contemporary Manufacturing Environment
Mallette Manufacturing, Inc., produces washing machines, dryers, and dishwashers. Because of increasing competition, Mallette is considering investing in an automated manufacturing system. Since competition is most keen for dishwashers, the production process for this line has been selected for initial evaluation. The automated system for the dishwasher line would replace an existing system (purchased one year ago for $6 million). Although the existing system will be fully
The existing system is capable of producing 100,000 dishwashers per year. Sales and production data using the existing system are provided by the Accounting Department:
| Sales per year (units) | 100,000 |
| Selling price | $300 |
| Costs per unit: | |
| Direct materials | 80 |
| Direct labor | 90 |
| Volume-related |
20 |
| Direct fixed overhead | 40* |
*All cash expenses with the exception of depreciation, which is $6 per unit. The existing equipment is being depreciated using straight-line with no salvage value considered.
The automated system will cost $34 million to purchase, plus an estimated $20 million in software and implementation. (Assume that all investment outlays occur at the beginning of the first year.) If the automated equipment is purchased, the old equipment can be sold for $3 million.
The automated system will require fewer parts for production and will produce with less waste. Because of this, the direct material cost per unit will be reduced by 25 percent. Automation will also require fewer support activities, and as a consequence, volume-related overhead will be reduced by $4 per unit and direct fixed overhead (other than depreciation) by $17 per unit. Direct labor is reduced by 60 percent. Assume, for simplicity, that the new investment will be depreciated on a pure straight-line basis for tax purposes with no salvage value. Ignore the half-life convention.
The firm’s cost of capital is 12 percent, but management chooses to use 20 percent as the required
The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems.
Required:
1. Compute the
| Old system | $20,087,520 |
| New system | $fill in the blank 2 |
Which system would the company choose?
Old system
2. Repeat the net present value analysis of Requirement 1, using 12 percent as the discount rate.
| Old system | $fill in the blank 4 |
| New system | $fill in the blank 5 |
3. Upon seeing the projected sales for the old system, the marketing manager commented: “Sales of 100,000 units per year cannot be maintained in the current competitive environment for more than one year unless we buy the automated system. The automated system will allow us to compete on the basis of quality and lead time. If we keep the old system, our sales will drop by 10,000 units per year.” Repeat the net present value analysis, using this new information and a 12 percent discount rate.
| Old system | $fill in the blank 6 |
4. An industrial engineer for Mallette noticed that salvage value for the automated equipment had not been included in the analysis. He estimated that the equipment could be sold for $4 million at the end of 10 years. He also estimated that the equipment of the old system would have no salvage value at the end of 10 years. Repeat the net present value analysis using this information, the information in Requirement 3, and a 12 percent discount rate.
| New system | Increases | to | NPV = $fill in the blank 8 |
| Old system | Unchanged | to | NPV = $fill in the blank 10 |
![EXHIBIT 19B.2
Present Value of an Annuity of $1 in Arrears*
Periods
2%
4%
6%
8%
10%
12%
14% 16%
18%
20%
22%
24%
26%
28%
30%
32%
40%
1
0.980
0.962
0.943
0.926 0.909
0.893
0.877 0.862
0.847
0.833
0.820
0.806
0.794
0.781
0.769
0.758
0.714
1.866
1.833
2.673
1.942
1.783
1.736
1.690
1.647 1.605
1.566
1.528
1.492
1.457
1.424
1.392
1.361
1.331
1.224
2.775
2.402
2.322 2.246
2.106
2.042
1.981
1.923
2.320
2.635
2.884
2.577 2.487
2.174
1.868
1.816
1.766
1.589
3.630
3.808
4.713
3.465
4.212
3.037
3.605
2.914 2.798
3.433 3.274
2.690
3.127
2.589
2.494
2.241
2.096
2.345
3.312 3.170
2.404
2.166
2.436
1.849
2.745
3.020
4.452
3.993
3.791
2.991
2.864
2.532
2.035
5.601
5.242
4.917
4.623 4.355
4.111
3.889 3.685
3.498
3.326
3.167
2.885
2.759
2.643
2.534
2.168
4.564
4.968
6.472
6.002
5.582
5.206 4.868
4.288 4.039
3.812
3.605
3.416
3.242
3.083
2.937
2.802
2.677
2.263
4.63
6.73
7.435
8.111
6.210
5.335
6.247 5.759
6.710 6.145
4.344
3.078
3.837
3.421
3.241
3.366
3.465
7.325
5.74)
3.61
3.076
2.925
2.7
2.331
8.162
8.983
9.787
6.802
7.360
3.019
3.092
5.328
4.946 4.607
5.216 4.833
4.303
4.494
4.031
4.192
3.786
3.923
3.566
3.184
3.269
3.335
9.
2.868
2.379
5.650
3.682
2.930
2.414
2.978
3.013
11
8.760
7.887
7.139 6.495
5.938
5.453 5.029
4.656
4.327
4.035
3.776
3.543
3.147
2.438
12
10.575
9.385
8.384
7.536 6.814
6.194
5.660 5.197
4.793
4.439
4.127
3.851
3.606
3.387
3.190
2.456
13
11.348
9.986
8.853
7.904 7.103
6.424
5.842 5.342
4.910
4.533
4.203
3.912
3.656
3.427
3.223
3.040
2.469
12.106 10.563
9.295
9.712
8.244 7.367
6.002 5.468
6.142 5.575
5.008
5.092
4.265
3.962
3.695
3.726
3.459
3.249
3.268
2.478
2.484
14
6.628
4.611
3.061
15
12.849 11.118
8.559
7.606
6.811
4.675
4.315
4.001
3.483
3.076
7.824
13.578 11.652 10.106
14.292 12.166 10.477
8.851
6.265 5.668
4.730
4.033
3.751
3.503
3.088
2.489
2.492
16
6.974
5.162
4.357
3.283
17
9.122
8.022
7.120
6.373 5.749
5.222
4.775
4.391
4.059
3.771
3.518
3.295
3.097
14.992 12.659 10.828
8.201
7.250
7.366
18
9.372
6.467 5.818
5.273
4.812
4.419
4.080
3.786
3.529
3.304
3.104
2.494
15.678 13.134 11.158
9.604 8.365
6.550 5.877
5.316
4.843
4.870
4.891
4.909
3.799
3.539
3.311
3.109
3.113
3.116
19
4.442
4.097
2.496
3.808
3.816
7.469
13.590 11.470
17.011 14.029 11.764 10.017 8.649
6.623 5.929
6.687 5.973
2.497
2.498
2.498
4.460
20
21
4.110
4.121
16.351
9.818 8.514
5.353
3.546
3.316
7.562
5.384
4.476
3.551
3.320
22
17.658 14.451 12.042 10.201 8.772
7.645
4.488
3.556
3.323
3.118
3.120
3.121
6.743 6.011
5.410
4.130
3.822
8.883
8.985
23
18.292 14.857 12.303 10.371
7.718
6.792 6.044
5.432
4.925
4.499
4.137
3.827
3.559
3.325
2.499
24
18.914 15.247 12.550 10.529
7.784
6.835 6.073
5.451
4.937
4.507
4.143
3.831
3.562
3.327
2.499
19.523 15.622 12.783 10.675
20.121
7.843
7.896
3.834
3.837
9.077
6.873 6.097
6.906 6.118
5.467
5.480
4.948
4.147
3.564
3.329
3.330
3.122
3.123
25
4.514
2.499
26
15.983 13.003 10.810
9.161
4.956
4.520
4.524
4.528
4.151
3.566
2.500
27
20.707 16.330 13.211 10.935 9.237
7.943
6.935 6.136
5.492
4.964
4.154
3.839
3.567
3.331
3.123
2.500
28
21.281 16.663 13.406 11.051
9.307
7.984
6.961 6.152
5.502
4.970
4.157
3.840
3.568
3.331
3.124
2.500
29
21.844 16.984 13.591
11.158 9.370
8.022
6.983 6.166
5.510
4.975
4.531
4.159
3.841
3.569
3.332
3.124
2.500
30
22.396 17.292 13.765 11.258 9.427
8.055
7.003 6.177
5.517
4.979
4.534
4.160
3.842
3.569
3.332
3.124
2.500
*Pn = (1/1) x [1 – 1/(1 + 1)"].
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