The management of Devine Instrument Company is considering the purchase of a new

Question

The management of Devine Instrument Company is considering the purchase of a new drilling machine, model RoboDril 1010K. According to the specifications and testing results. RoboDril will substantially increase productivity over AccuDril X10, the machine Devine is currently using. The AccuDril was acquired 8 years ago for $120,000 and is being depreciated using the straight- line method over a 10-year expected life and an estimated salvage value of $20,000. The engineering department expects the AccuDril to keep going for another 3 years after a major overhaul at the end of its expected useful life. The estimated cost for the overhaul is $100.000. e overhauled machine will be depreciated using straight-ine depreciation with no salvage val ue. The overhaul will improve the machine's operating efficiency approximately 15% for each of years 3. 4, and 5. No other operating conditions will be affected by the overhaul. RoboDril 1010K is selling for $240.000. Installing, testing, rearranging, and training will cost another $10.,000. The manufacturer is willing to take the AccuDril as a trade-in for $20.000. T RoboDril will be depreciated using the straight-line method with no salvage value. New technology most likely will make RoboDril obsolete to the firm in 5 years. hee Variable operating cost for either machine is the same: $11 per machine hour (cash-based). Other pertinent data follow AccuDriI Robotril x10 1e,eae 8,88e 1e18K 13,8e0 4,8ee s 18e Units of output (per year) Machine hours Selling price per unit variable manufacturing cost-cash-based not including machine hours) Other annual expenses (tooling and supervising) Disposal valuer today Disposal value-ie 5 yeans $ 25 $78,88e s25,eae $25 $48,888 $5e,eae Devine Instrument Company's weighted-average cost of capital (WACC) is 12% and it is in the 40 tax brackes Use the PV factors ppendik .Tabist) for calculating the NPV of each decision alternative

Explanation / Answer

This problem is related to captial budgeting and calculation of NPV.

Step 1:- Determine the value of cashflows for Accudril and Robodril.

Accudril = amount before depreciation and taxes (Rs 1130000)
Robodril= amount before depreciation and taxes (Rs 1160000)

Step 2 :- Calculation of Amount After taxes and before depreciation

Accudril= 1130000-452000=678000

Robodril= 1160000-464000=696000

Step 3:- Calculation of depreciation from 0 to 5 years

since it is straight line method the formula is as below

Amount - Salvage Value /No of years

120000-20000/5= Rs 20000

Therefore amount after depreciation and taxes will be

Accudril = 678000-20000=658000 Rupees

Robodril= 652000-24000=628000 Rupees-10000= 638000 Rupees

Step 4 Calculation of present Values for cost of capital

Step 5:- Calculation of Cash Flow after deducting the disposal amount :-

Accudril =658000-25000=633000 Rupees

Robodril= 628000-50000=623000 Rupees

Particulars Accudril Roboril Sales 10000*10=1000000 1000000 + Variable Cost 8000*11=88000+25=88025 88000+25=88025 - Other Expenses 70000 40000

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.