Migami Company is considering the purchase of a new ma- chine. The invoice price of the machine

Question:

Migami Company is considering the purchase of a new ma- chine. The invoice price of the machine is $122,000, freight charges are estimated to be $3,000, and installation costs are expected to be $5,000. The salvage value of the new equipment is expected to be zero after a useful life of four years. Existing equipment could be retained and used for an additional four years if the company does not purchase the new machine. At that time, the equipment's salvage value would be zero. If the company purchases the new machine now, it would have to scrap the existing machine. Migami's accountant, Caitlyn Lahr, has accumulated the following data regarding annual sales and expenses with and without the new machine:

1. Without the new machine, Migami can sell 10,000 units of product annually at a per-unit selling price of $100. With the new machine, the number of units produced and sold would increase by 20%, and the selling price would remain the same.

2. The new machine is faster than the old machine, and it is more efficient in its use of materials. With the old machine, the gross profit rate is 28.5% of sales, whereas the rate will be 30% of sales with the new machine.

3. Annual selling expenses are $160,000 with the current equipment. Because the new equipment would produce a greater number of units to be sold, annual selling expenses are expected to increase by 10% if it is purchased.

4. Annual administrative expenses are expected to be $100,000 with the old machine, and $112,000 with the new machine.

5. The current book value of the existing machine is $40,000. Migami uses straight-line depreciation.

6. Migami management has a required rate of return of 15% on its investments and a payback period of no more than three years.

Instructions

(a) Calculate the annual rate of return for the new machine.

(b) Calculate the payback period for the new machine.

(d) Based on your answer above, would you recommend that Migami buy the machine? Why or why not?

Net Present Value
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... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...