This is a decision to keep or replace current equipment, mutually exclusive alte

Question

This is a decision to keep or replace current equipment, mutually exclusive alternatives. The question asks for the difference in the net present values of the two alternatives, not the net present value of one or the other. Use the present value tables on page 118 to compute present values. ______________________________________________________ Page 118 is the attached picture

Nautical Creations is one of the largest producers of miniature ships in a bottle. An especially complex part of one of the ships needs special production equipment that is not useful for other products. The company purchased this equipment early in 2012 for $200,000. It is now early in 2015, and the manager of the Model Ships Division, Jeri Finley, is thinking about purchasing new equipment to make this part. The current equipment will last for four more years with zero disposal value at that time. It can be sold immediately for $30,000. The following are last year's per-unit manufacturing costs, when production was 8,600 ships:
Direct materials $3.70 Direct labor 3.70 Variable overhead 1.80 Fixed overhead 4.55 Total unit cost $13.75
The cost of the new equipment is $150,000. It has a four year useful life with an estimated disposal value at that time of $30,000. The sales representative selling the new equipment stated, "The new equipment will allow direct labor and variable overhead to be reduced by a total of $1.95 per unit." Finley thinks this estimate is accurate, but also knows that a higher quality of direct material will be necessary with the new equipment, costing $0.17 more per unit. Fixed overhead costs will increase by $5,000.
Finley expects production to increase to 9,050 ships in each of the next four years. Assume a discount rate of 5%.

REQUIRED
1. What is the difference in net present values if Nautical Creations buys the new equipment instead of keeping their current equipment?
Table 1: Present Value of $1.00 0961 0.924 0.888 0835 772 0 751 0.7 0792 | 0.7350.NA 068310.6 59 | 0.636 | 0.01) 0592 0572 0942 0,888 0933 0871 0790 0.746 0.705 0813 0,760 14 0.500 12 0788 0.701 0.205 Table 2: Present Value of an Annuity of $1.00 19% 0.962 0952 885 0.877 0 870 1.970 1.942 1.913 I 1859 1.833 736 .795 360 3.41752423.0764.917 4.76 4.623 4486 43 7.020 6.7336.4636210 5.971 5.747 5535 5.33 8.566 8.162 8.983 8.530 7.024 | 6.710 6.418 6.1 10 11 10.368 9.787 9253 8.760 8306 887 7.499 139 6.805 6895 6207 7.904 7487 7.1036 13 12 134 989 9.298.7 7.786 67 6982 6628 6.302 6.002

Explanation / Answer

Answer:

Difference in NPV=$201671

Current equipment Buy equipment Particulars Time P.V.F (5%) Amount PV Amount PV Purchase cost 0 1 -200000 -200000 -150000 -150000 Salvage value 4 0.8227 0 0 30000 24681 other cost (8600*13.75) 1-4 3.546 -118250 -419315 0 Other cost (9050*7.42) 1-4 3.546 -67151 -238117 Fixed cost (8600*4.55+5000) 1-4 3.546 -44130 -156485 NPV -318250 -519921

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