The management of Langdale Mill is considering replacing a number of old looms i
ID: 1231900 • Letter: T
Question
The management of Langdale Mill is considering replacing a number of old looms in the mill's weave room. The looms to be replaced are two 220-cm President looms, sixteen 135-cm President lomms. and twenty-two 185-cm Draper X-P2 looms. The company may either replace the old looms with new ones of the same kind or buy 21 new shutterless Pignone looms. the first alternative requires the purchase of 40 new president and Draper looms and the scrapping of the old looms. The second alternative involves scrapping the 40 old looms, relocating 12 Picanol looms, and constructing a concrete floor. plus purchasing the 21 Pignone and various related equipment. The underpreciated capital cost (UCC) of all old looms at the time of scrapping is negligible. The corporate executives feel that various investment opportunities available for the mill will guarantee a rate of return on investment of atleast 15%. The mill's marginal tax rate is 40%. Which alternative is better? (Use NPW method)Explanation / Answer
npv=-c0+r(t)/(1+i)^t where r is the income in coming years let for alternative 1 : c0= investment =machinery cost +removal cost +annual labour cost +annual o&m+cca and r that is net income =salvage value of old looms +salvage value +annual sales increase with new which is given as ($30000/(1+.15)^8)+$160000/(1+.15)^8+$8,000,000/(1+1.5)^t where t is varying from 1 to 8 . ) similarly we can calculate for the other alternative *************** the one having higher positive value of npv is the better alternative
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