As the cost accounting manager at Cambria Chemicals (CC), you are responsible for compiling and reporting various performance measures to the senior managers. The company instituted many efficiency improvement programs recently, and the CFO has asked you to measure and report partial productivity for both labor and materials. Data for the last two years follow.

	Year 2			Year 1
Gallons input (thousands)		9,600			8,600
Labor-hours (thousands)		8,900			6,500
Gallons of output (thousands)		11,400			9,400

From the accounting records, you also gather the following information for the two years.

	Year 2				Year 1
Cost of inputs (per gallon)	$	85			$	81
Wage rate (per hour)	$	23			$	18
Total manufacturing overhead	$	1,350,000			$	1,170,000
Selling price of output (per gallon)	$	375			$	380

Required:

a. Compute the total factor productivity measures for year 1 and year 2 based on the three inputs (material, labor, and overhead). (Round your answers to 3 decimal places.)

____________________________________________________________

Dungan Corporation is evaluating a proposal to purchase a new drill press to replace a less efficient machine presently in use. The cost of the new equipment at time 0, including delivery and installation, is $225,000. If it is purchased, Dungan will incur costs of $6,000 to remove the present equipment and revamp its facilities. This $6,000 is tax deductible at time 0.

Depreciation for tax purposes will be allowed as follows: year 1, $50,000; year 2, $80,000; and in each of years 3 through 5, $40,000 per year. The existing equipment has a book and tax value of $110,000 and a remaining useful life of 10 years. However, the existing equipment can be sold for only $50,000 and is being depreciated for book and tax purposes using the straight-line method over its actual life.

Management has provided you with the following comparative manufacturing cost data.

	Present Equipment			New Equipment
Annual capacity (units)		410,000			410,000
Annual costs:
Labor	$	42,500		$	35,000
Depreciation		20,000			24,000
Other (all cash)		58,000			30,000
Total annual costs	$	98,000		$	69,000

The existing equipment is expected to have a salvage value equal to its removal costs at the end of 10 years. The new equipment is expected to have a salvage value of $70,000 at the end of 10 years, which will be taxable, and no removal costs. No changes in working capital are required with the purchase of the new equipment. The sales force does not expect any changes in the volume of sales over the next 10 years. The companys cost of capital is 16 percent, and its tax rate is 25 percent. Use Exhibit A.8.

Required:

a. Calculate the removal costs of the existing equipment net of tax effects.

b. Compute the depreciation tax shield. (Round PV factors to 3 decimal places.)

c. Compute the forgone tax benefits of the old equipment.

d. Calculate the cash inflow, net of taxes, from the sale of the new equipment in year 10.

e. Calculate the tax benefit arising from the loss on the old equipment.

f. Compute the annual differential cash flows arising from the investment in years 1 through 10.

g. Compute the net present value of the project.