Capital Budgeting: Dafina Instrument Company

The management of Dafina Instrument Company (SDI) is considering the purchase of a new robotic machine, the RoboSP model. According to the specifications and test results, RoboSP will significantly increase the productivity of the AccuX model, the machine currently used by SDI.

AccuX, acquired 8 years ago with a purchase price of RM120,000 and depreciated over 10 years of age with a residual value of RM20,000. The Engineering Department expects the AccuX to be usable for another three years of major overhauls made at the end of its useful life. The estimated cost of the repair is RM100,000. Machines that have been repaired will be depreciated using the straight line method with no residual value. This overhaul will increase the operating efficiency of the machine by approximately 20%. No more operating conditions are affected by this overhaul.

RoboSP is sold for RM250,000. The installation, testing and training of this machine requires an additional cost of RM30,000. The manufacturer is willing to trade on AccuX for RM40,000. RoboSP will be depreciated using the straight line method with no residual value. The emergence of new technologies will result in the obsolescence of RoboSP to the firm within five years.

The variable operating cost for both machines is the same at RM10 per hour. Other information is as follows:

AccuX Robo SP Output units (per year) 10,000 10.000 Engine clock 8,000 4.000 Selling price per unit RM100 RM100 Variable production costs (excluding machine hours) RM40 RM40 Other annual expenses (equipment and supervision) RM95,000 RM55.000 Disposal value - present RM25,000 Disposal value - in five years 0 RM50.000