MANAGERIAL ACCOUNTING W/CONNECT
MANAGERIAL ACCOUNTING W/CONNECT
16th Edition
ISBN: 9781260586916
Author: Garrison
Publisher: MCG CUSTOM
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Chapter 13, Problem 20P
To determine

To analysis:

Whether to purchase the automated welding machine or not.

Expert Solution
Check Mark

Answer to Problem 20P

Solution:

No, it is not advisable to purchase the automated welding machine.

Explanation of Solution

On the basis of net present value, it will be decided whether to purchase the automated welding machine or not.

The net present value of the automated machine will be calculated as under −

The present value of cash outflows will be calculated as under −

Given,

  • Cost of machine = $ 250,000
  • Software and installation = $ 80,000
  • Salvage value of old machine = $ 12,000
  • Replacement parts cost in year 3 = $ 45,000
    Total Present value of cash out flows
    Cost of machine 250,000
    Software and installation 80,000
    Less: Salvage value of old machine -12,000
    Present value of replacement of parts
    Replacement parts cost 45,000
    PVIF @ 16 % for 4 year 0.552 24,840
    Total Present value of cash out flows 342,840

The total present value of cash outflows = $ 342,840.

Now, the present value of cash inflows will be calculated as −

Given,

  • Annual net savings from year 1 to 6 = $ 78,500
  • Salvage value of new machine at the year of year 6 = $ 20,000
    Total present value of Cash Inflows
    Year PVIF @ 16 % (2) Present value of cash inflow (1) X (2)
    1 to 6 Annual net savings = $ 78,500 3.685 289,272.50
    6 Salvage value = $ 20,000 0.410 8,200
    Total present value of Cash Inflows 297,472.50

The present value of cash inflows = $ 297,472.50.

Now, the net present value of automated welding machine will be calculated as under −

Given,

  • Total present value of cash inflows = $ 297,472.50.
  • Total present value of cash outflows = $ 342,840
  •   Net present value = Total present value of cash inflows  Total present value of cash outflowsNet present value = $ 297,472.50.  $ 342,840Net present value = - $ 45,367.50

    The net present value is = - $ 45,367.50 i.e., negative, so it is not advisable to purchase the automated welding machine.

    Note: PVIF values are taken from the charts provided.

    Conclusion

    Thus, it is not advisable to purchase the automated welding machine.

    Requirement 3

    To determine

    To compute:

    Minimum dollar value per year to make the new welding machine as acceptable investment.

    Expert Solution
    Check Mark

    Answer to Problem 20P

    Solution:

    Minimum dollar value per year to make the new welding machine as acceptable investment = $ 12,311.40

    Explanation of Solution

    The minimum dollar value per year to make new welding machine as acceptable investment will be calculated as under −

    Given,

    • Net present Value of welding machine = - $ 45,367.50
    • PVAF @ 16 % for 6 years = $ 3.6853
    •   Minimum dollar value per year = Net present Value of welding machine PVAF @ 16 % for 6 yearsMinimum dollar value per year = $ 45,367.50 3.685Minimum dollar value per year =$12,311.40

    The machine should provide at least a benefit of $ 12,311.40 per year to make it acceptable.

    Conclusion

    Thus, the minimum dollar value per year to make the new welding machine as acceptable investment has been calculated.

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