12p2
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-ine 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. The overhauled machine will be depreciated using straight-line depreciation with no salvage value. The overhaul will improve the machine's operating efficiency approximately 15% for each of years 34, 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. The 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 Variable operating cost for either machine is the same: $11 per machine hour (cash-based. Other pertinent data follow AccuDril X18 18,886 8,800 s 18e RoboDril 1e18K 18,688 4,806 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 value-today Disposal value-in 5 years s 180 18e $ 25 $70,806 48,800 $ 25 $25,890 $58,e6 Devine Instrument Company's weighted-average cost of capital (WACC) is 12%, and it is in the 40% tax bracket. Use the PV factors (Appendix C. Table 1) for calculating the NPV of each decision alternative Part 1 Required: 1. Determine for each of years 0 thougn 5 (inclusive) the after-tax cash flows for items that diafer oetween the two alternatives. 2. Compute the payback period (in years) for purchasing RoboDril 1010K rather than heving AccuDril X10 overhauled in 2 years 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-ine 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. The overhauled machine will be depreciated using straight-line depreciation with no salvage value. The overhaul will improve the machine's operating efficiency approximately 15% for each of years 34, 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. The 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 Variable operating cost for either machine is the same: $11 per machine hour (cash-based. Other pertinent data follow AccuDril X18 18,886 8,800 s 18e RoboDril 1e18K 18,688 4,806 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 value-today Disposal value-in 5 years s 180 18e $ 25 $70,806 48,800 $ 25 $25,890 $58,e6 Devine Instrument Company's weighted-average cost of capital (WACC) is 12%, and it is in the 40% tax bracket. Use the PV factors (Appendix C. Table 1) for calculating the NPV of each decision alternative Part 1 Required: 1. Determine for each of years 0 thougn 5 (inclusive) the after-tax cash flows for items that diafer oetween the two alternatives. 2. Compute the payback period (in years) for purchasing RoboDril 1010K rather than heving AccuDril X10 overhauled in 2 years
