Fahringer Corporation makes three products that use compound W, the current cons

Question

Fahringer Corporation makes three products that use compound W, the current constrained resource. Data concerning those products appear below:

BJ

XS

QR

  Selling price per unit

$104.95  

$528.15  

$558.09  

  Variable cost per unit

$ 82.05  

$429.72  

$420.02  

  Centiliters of compound W

2.00  

9.30  

9.50  

Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized. (Round your intermediate calculations to 2 decimal places.)

1. QR,BJ,XS

2. XS,BJ,QR

3. BJ,QR,XS

4. QR,XS,BJ

(Ignore income taxes in this problem.) The management of Stanforth Corporation is investigating automating a process. Old equipment, with a current salvage value of $15,000, would be replaced by a new machine. The new machine would be purchased for $450,000 and would have a 6 year useful life and no salvage value. By automating the process, the company would save $155,000 per year in cash operating costs. The simple rate of return on the investment is closest to:

1. 17.8%

2. 34.4%

3. 18.4%

4. 16.7%

Boyson, Inc. is investigating an investment in equipment that would have a useful life of 7 years. The company uses a discount rate of 15% in its capital budgeting. The net present value of the investment, excluding the salvage value, is -$578,977. (Ignore income taxes this problem.)

Click here to view Exhibit 13B-1 to determine the appropriate discount factor(s) using tables.

How large would the salvage value of the equipment have to be to make the investment in the equipment financially attractive? (Round discount factor(s) to 3 decimal places and final answers to the nearest dollar amount.)

1. $578,977

2. $86,847

3. $1,539,832

4. $3,859,847

Fahringer Corporation makes three products that use compound W, the current constrained resource. Data concerning those products appear below:

Explanation / Answer

Answer 1 Calculation of Profitability BJ XS QR Selling Price per unit $104.95 $528.15 $558.09 (-) Variable cost per unit $82.05 $429.72 $420.02 Profit per unit $22.90 $98.43 $138.07 Ranking of the product based on profitability QR,XS,BJ Answer 2 Depreciation on new machine = $450000 / 6 = $75000 per year Save in cash operating cost = $155000 Net saving in operating cost = $155000 - $75000 = $80000 Net Cost of new machine = $450000 - $15000 = $435000 Simple rate of return on investment = (Net saving in operating cost / net cost of new machine) *100 Simple rate of return on investment = ($80000/ $435000) *100 = 18.40% Answer 3 Useful life of equipment = 7 years Calculation of present value of all 4 options at discount rate of 15% Option Value PV Factor Present Value 1 $5,78,977.00 0.37593704 $2,17,659 2 $86,847.00 0.37593704 $32,649 3 $15,39,832.00 0.37593704 $5,78,880 4 $38,59,847.00 0.37593704 $14,51,059 Present value of salvage value $1539832 is almost equal to net present value of the investment $578977. Hence minimum salvage value should be $1539832 to make the investment in the equipment financally attractive. The answer is the 4th option i.e. salvage value = $3859847 At this , the present value is $14,51,059 which very well covers the entire negative net present value of the investment.

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