Special People Industries (SPI) is a nonprofit organization which employs only p

Question

Special People Industries (SPI) is a nonprofit organization which employs only people with physical or mental disabilities. One of the organization's activities is to make cookies for its snack food store. Several years ago. Special People Industries purchased a special cookie-cutting machine. As of December 31, 20x0, this machine will have been used for three years. Management is considering the purchase of a newer, more efficient machine. If purchased, the new machine would be acquired on December 31, 20x0. Management expects to sell 300,000 dozen cookies in each of the next six years. The selling price of the cookies is expected to average $1.15 per dozen. Special People Industries has two options: continue to operate the old machine, or sell the old machine and purchase the new machine. No trade-in was offered by the seller of the new machine. The following information has been assembled to help management decide which option is more desirable. Assume that all operating revenues and expenses occur at the end of the year. Use Appendix A for your reference. Use the net-present-value method to compute the net-present-value for the old machine and the new machine. The organization's hurdle rate is 16 percent.

Explanation / Answer

Old machine dozens 300000 300000 per dozen $1.15 0.38 Year Revenue Variable Cost Fixed cost Income before depreciation Depreciation   D Cash Inflow Discount Factor 16% Discouned cash Inflow 0 1 $345,000 $114,000 $21,000 $210,000 8111 $218,111 0.8621 $188,026.82 2 $345,000 $114,000 $21,000 $210,000 $8,111 $218,111 0.7432 $162,092.09 3 $345,000 $114,000 $21,000 $210,000 $8,111 $218,111 0.6407 $139,734.56 4 $345,000 $114,000 $21,000 $210,000 $8,111 $218,111 0.5523 $120,460.83 5 $345,000 $114,000 $21,000 $210,000 $8,111 $218,111 0.4761 $103,845.54 5 $345,000 $114,000 $21,000 $210,000 $8,111 $218,111 0.4104 $89,522.02 6 $345,000 $114,000 $21,000 $210,000 $8,111 $218,111 0.3538 $77,174.15 6 $7,000 $7,000 $7,000 0.3538 $2,476.81 Total $2,422,000 $798,000 $147,000 $1,477,000 $56,778 $1,533,778 $883,333 NPV $883,333 Depreciation= 80000-7000/9 8111 New Machine dozens 300000 300000 per dozen $1.15 0.29 Year Cash outflow Revenue Variable Cost Fixed cost Income before depreciation Depreciation   D Cash Inflow Discount Factor 16% Discouned cash Inflow 0 -80000 -80000 1 ($80,000.00) 1 $345,000 $87,000 $11,000 $247,000 16667 $263,667 0.8621 $227,298.85 2 $345,000 $87,000 $11,000 $247,000 $16,667 $263,667 0.7432 $195,947.28 3 $345,000 $87,000 $11,000 $247,000 $16,667 $263,667 0.6407 $168,920.07 4 $345,000 $87,000 $11,000 $247,000 $16,667 $263,667 0.5523 $145,620.75 5 $345,000 $87,000 $11,000 $247,000 $16,667 $263,667 0.4761 $125,535.13 5 $345,000 $87,000 $11,000 $247,000 $16,667 $263,667 0.4104 $108,219.94 6 $345,000 $87,000 $11,000 $247,000 $16,667 $263,667 0.3538 $93,293.05 6 $7,000 $7,000 $7,000 0.3538 $2,476.81 Total $2,422,000 $609,000 $77,000 $1,736,000 $116,667 $1,852,667 $987,312 NPV $987,312 Depreciation= 120000-20000/6 16667 Initial cash outflow $120000-40000 $80,000 Note If depreciation not taken, we shopuld take depreciation, it is mentioned total fixed cost but I presume that depreciation is not included so included depreciation in cash inflow in my above solution Old machine dozens 300000 300000 per dozen $1.15 0.38 Year Revenue Variable Cost Fixed cost Income before depreciation Depreciation   D Cash Inflow Discount Factor 16% Discouned cash Inflow 0 1 $345,000 $114,000 $21,000 $210,000 0 $210,000 0.8621 $181,034.48 2 $345,000 $114,000 $21,000 $210,000 $0 $210,000 0.7432 $156,064.21 3 $345,000 $114,000 $21,000 $210,000 $0 $210,000 0.6407 $134,538.11 4 $345,000 $114,000 $21,000 $210,000 $0 $210,000 0.5523 $115,981.13 5 $345,000 $114,000 $21,000 $210,000 $0 $210,000 0.4761 $99,983.73 5 $345,000 $114,000 $21,000 $210,000 $0 $210,000 0.4104 $86,192.87 6 $345,000 $114,000 $21,000 $210,000 $0 $210,000 0.3538 $74,304.20 6 $7,000 $7,000 $7,000 0.3538 $2,476.81 Total $2,422,000 $798,000 $147,000 $1,477,000 $0 $1,477,000 $850,576 NPV $850,576 New Machine dozens 300000 300000 per dozen $1.15 0.29 Year Cash outflow Revenue Variable Cost Fixed cost Income before depreciation Depreciation   D Cash Inflow Discount Factor 16% Discouned cash Inflow 0 -80000 -80000 1 ($80,000.00) 1 $345,000 $87,000 $11,000 $247,000 0 $247,000 0.8621 $212,931.03 2 $345,000 $87,000 $11,000 $247,000 $0 $247,000 0.7432 $183,561.24 3 $345,000 $87,000 $11,000 $247,000 $0 $247,000 0.6407 $158,242.45 4 $345,000 $87,000 $11,000 $247,000 $0 $247,000 0.5523 $136,415.90 5 $345,000 $87,000 $11,000 $247,000 $0 $247,000 0.4761 $117,599.91 5 $345,000 $87,000 $11,000 $247,000 $0 $247,000 0.4104 $101,379.24 6 $345,000 $87,000 $11,000 $247,000 $0 $247,000 0.3538 $87,395.89 6 $7,000 $7,000 $7,000 0.3538 $2,476.81 Total $2,422,000 $609,000 $77,000 $1,736,000 $0 $1,736,000 $920,002 NPV $920,002

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