CPC Corporation is an international plumbing equipment and supply company located in southern California. The manger of
Question:
CPC Corporation is an international plumbing equipment and supply company located in southern California. The manger of the Pipe Division is considering the purchase of a computerized copper Pipe machine that costs $120,000.
The machine has a six-year life, and its expected residual value after six years of use will be 10 percent of its original cost. Cash revenue generated by the new machine is projected to be $50,000 in year 1 and will increase by $10,000 each year for the next five years. Variable cash operating costs will be materials and year for the next five years. Variable cash operating costs will be materials and parts, 25 percent of revenue; machine labor, 5 percent of revenue; and overhead, 15 percent of revenue. First-year sales and marketing cash outflows are expected to be $10,500 and will decrease by 10 percent each year over the life of the new machine. Anticipated cash administrative expenses will be $2,500 per year. The company uses a 15 percent minimum rate of return for all capital investment analyses.
1. Prepare an Excel spreadsheet to compute the net present value of the anticipated cash flows for the life of the proposed new machine. Use the following format:
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Should the company invest in the new machine?
2. After careful analysis, the controller has determined that the variable rate for materials and parts can be reduced to 22 percent of revenue. Will this reduction in cash outflow change the decision about investing in the new machine? Explain your answer.
3. The marketing manager has determined that the initial estimate of sales and marketing cash expenses was too high and has reduced that estimate by $1,000. The 10 percent annual reductions are still expected to occur. Together with the change in 2, will this reduction affect the initial investment decision? Explain your answer.
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
Step by Step Answer:
1Present value computed for first analysis Projected Cash Outflows Future Projected Materials Sales Admin Projected Present Time Cash and Machine and ...View the full answer
Managerial Accounting
ISBN: 9780538742801
11th Edition
Authors: Susan V. Crosson, Belverd E. Needles
