Bazzetta & Co., a scrap-metal company, supplies area steel companies with recycl
ID: 2735713 • Letter: B
Question
Bazzetta & Co., a scrap-metal company, supplies area steel companies with recycled materials. The company collects scrap metals, sorts, and cleans the material, and compresses it into one-ton blocks for easy handling. An increased demand for recycled metals has caused Mr. Bazzetta to consider the purchase of an additional metal-compressing machine. He has narrowed the choice, if he does indeed purchase any, to one of two models. The company’s management accountant has gathered the following information about each model.
Model One
Model Two
Life of Machine
10 years
10 years
Equipment Purchase Price
$100,000
$120,000
Salvage Value
12,000
20,000
Annual Depreciation
8,800
10,000
Annual Revenues
185000
207000
Annual Operating Costs
Direct Labor
40000
40000
Direct Materials
70000
80000
Operating Supplies
3,600
4,000
Indirect Labor
24000
36000
Insurance and taxes
1,600
2,000
Plant Rental
8,000
8,000
Electricity
1,100
1,120
Other Overhead
5,000
5,680
Bazzetta & Co. has used various decision criteria in the past. Until recently, Mr. Bazzetta had used a 15% after-tax accounting rate of return, but has decided to use a payback period of 5 years, and/or a 0.12 minimum rate of return to discount cash flows. The tax rate is expected to be 25%.
Required: On the accompanying sheets, delineate the cash flows for all of the feasible alternatives described above. After showing the cash flows, calculate the accounting rate of return, payback, net present value, and an estimate of the internal rate of return for each alternative. Evaluate the quality of each of the different alternatives; choosing the one you consider the best.
Using the six-step method outlined in class for making long-term decisions, help Bazzetta make the right economic decision.
State the problem:
Delineate feasible alternatives:
Establish the criteria to be used. Be specific; economic is not the answer, which form of economic decision is appropriate given the data.
Calculate the appropriate numbers for each alternative (use attached sheets or Excel):
Perform sensitivity analysis:
What decision should Bazzetta make? Fill in the following chart for both model types.
Model One
Criterion Value Decision (Accept or Reject)
Net Present Value
Payback
Accounting Rate of Return
Internal Rate of Return
Model Two
Criterion Value Decision (Accept or Reject)
Net Present Value
Payback
Accounting Rate of Return
Internal Rate of Return
Model One
Model Two
Life of Machine
10 years
10 years
Equipment Purchase Price
$100,000
$120,000
Salvage Value
12,000
20,000
Annual Depreciation
8,800
10,000
Annual Revenues
185000
207000
Annual Operating Costs
Direct Labor
40000
40000
Direct Materials
70000
80000
Operating Supplies
3,600
4,000
Indirect Labor
24000
36000
Insurance and taxes
1,600
2,000
Plant Rental
8,000
8,000
Electricity
1,100
1,120
Other Overhead
5,000
5,680
Explanation / Answer
Working:
Both of the project can be accepted, but if one has to be choosen out of two then should go with Model One as everything in comparison of Model two is better.
Model One : Net Present value $ 50,623 Payback (Years) 3.85 Accounting rate of return 17% Internal Rate of return 21%Related Questions
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