Modern Medical Mechanics (M 3 ) has to replace a production machine used to prod
ID: 2624716 • Letter: M
Question
Modern Medical Mechanics (M3) has to replace a production machine used to produce a single part. They need an evalaution of two alternative machine models. The forecasted demand for the part is shown below. The choice of machine will not affect this demand of the part nor the M3 revenue.
Both of the new machines will last four years and then be replaced with the salvage values at the end of 4 years that is listed below. Depreciation will be 5-year MACRS The two machines have the prices, production cost per part, and salvage value in year 4 as shown below. All setup of the new machines is part of the purchase price.
Using a 4-year time horizon, document and make a recommendation of which machine should be adopted from a financial perspective. Assume that there will not be any change in Revenue, S.G. & A or working capital resulting from this decision.
Platinum Model
Titanium Model
Purchase price
$188,000
$223,000
Salvage value
$50,000
$60,000
Production cost per part
$14.88
$12.45
Years
0
1
2
3
4
Annual part usage quantity
55,000
60,000
62,500
95,000
Time horizon
4
years
Income tax rate
15.00%
Capital gains tax rate
15.00%
MARR
12.50%
Depreciation
5
MACRS years
0
1
2
3
4
5
6
MACRS
20.00%
32.00%
19.20%
11.52%
11.52%
5.76%
$0
Modern Medical Mechanics (M3) has to replace a production machine used to produce a single part. They need an evalaution of two alternative machine models. The forecasted demand for the part is shown below. The choice of machine will not affect this demand of the part nor the M3 revenue.
Both of the new machines will last four years and then be replaced with the salvage values at the end of 4 years that is listed below. Depreciation will be 5-year MACRS The two machines have the prices, production cost per part, and salvage value in year 4 as shown below. All setup of the new machines is part of the purchase price.
Using a 4-year time horizon, document and make a recommendation of which machine should be adopted from a financial perspective. Assume that there will not be any change in Revenue, S.G. & A or working capital resulting from this decision.
Platinum Model
Titanium Model
Purchase price
$188,000
$223,000
Salvage value
$50,000
$60,000
Production cost per part
$14.88
$12.45
Years
0
1
2
3
4
Annual part usage quantity
55,000
60,000
62,500
95,000
Time horizon
4
years
Income tax rate
15.00%
Capital gains tax rate
15.00%
MARR
12.50%
Depreciation
5
MACRS years
0
1
2
3
4
5
6
MACRS
20.00%
32.00%
19.20%
11.52%
11.52%
5.76%
$0
Explanation / Answer
Machine Platinum 0 1 2 3 4 Initial Cost -188000 Annual Part Usage 55000 60000 62500 95000 Production cost per part 14.88 14.88 14.88 14.88 Total production cost -818400 -892800 -930000 -1413600 Depreciation % 20.00% 32.00% 19.20% 11.52% Depreciation expense -37600 -60160 -36096 -21657.6 Net income -727600 -810016 -821182 -1219969 Cash flow (Net income + depreciation) -690000 -749856 -785086 -1198311 salvage value 50000 Book value at the end of 4 years 32486.4 After tax salvage value of machine 47372.96 Net worth of machine $ (2,663,728.03) Machine Titanium 0 1 2 3 4 Initial Cost -223000 Annual Part Usage 55000 60000 62500 95000 Production cost per part 12.45 12.45 12.45 12.45 Total production cost -684750 -747000 -778125 -1182750 Depreciation % 20.00% 32.00% 19.20% 11.52% Depreciation expense -44600 -71360 -42816 -25689.6 Net income -619947.5 -695606 -697800 -1027174 Cash flow (Net income + depreciation) -575347.5 -624246 -654984 -1001484 salvage value 60000 Book value at the end of 4 years 38534.4 After tax salvage value of machine 56780.16 Net worth of machine $ (2,277,441.49) Net worth of Machine Titatnium is higher and it should be chosen
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