Question
Australian Defence Supplies also has an existing operation making portable utensils and products for mobile use and currently uses an injection moulding machine that was
Australian Defence Supplies also has an existing operation making portable utensils and products for mobile use and currently uses an injection moulding machine that was purchased two years ago.This machine is being depreciated on straight line basis over eight years; it has six years of remaining life, and a current book value of$430,000. This current machine could be sold today for $98,000.A replacement machine can be purchased today at a cost of $1,300,000. The replacement machine has an estimated useful life of six years, and an estimated salvage value of $150,000 at the end of its useful life. This machine can be depreciated for tax purposes over a five-year straight-line schedule.
The division manager expects, but is not very certain, that the replacement machine would permit an output expansion of 11,500 units in the first year, 12,500 units in the second year and 14,000 thereafter from the current output of 111,080 units -and that you can sell all output at a current price of $21 per unit. Even so, one of the big advantages of the machine is its greater operating efficiency. Again, without great certainty, the managing director expects to save $2.25 per unit in current dollars off the current operating costs over the longer term, but in the first year the saving would only be $1.50 per unit (while the workers learn to use the machine). The new machine would require inventories to be increased by $300,000, while accounts payable would simultaneously increase by $100,000.
Determine whether the company should undertake the proposed replacement project as per NPV method of replacement of assets at cost of capital of 11.17%? Comment on critical issues to be considered. on excel
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