ColeFyre makes cast-metal medallions. The current level of production and sales is 10,000 medallions per year. A key operation is molding the medallions in a high temperature furnace. ColeFyre is thinking about replacing its older gas furnace with a newer, more energy-efficient solar model. Information related to the old and new furnaces follows:
Problem 2 (20 points) ColeFyre makes cast-metal medallions. The current level of production and sales is 10,000 medallions per year. A key operation is molding the medallions in a high temperature furnace. Cole Fyre is thinking about replacing its older gas furnace with a newer, more energy-efficient solar model. Information related to the old and new furnaces follows: Old New Original cost $42,000 $80,000 Accumulated depreciation $7,000 Not acquired yet Book value $35,000 Not acquired yet Current disposal value $20,000 Not acquired yet Installation cost Not applicable $3,000 Annual operating cost per unit $2.40 $1.00 Useful life 6 years 5 years Current age Remaining useful life 5 years 5 years Terminal disposal value (in 5 years) $0 $0 Ignore the effect of income taxes and the time value of money. 1 year O years Required: (show your work) 1. Should ColeFyre purchase the new furnace? Provide support for your answer. (6 points) 2. Assume the purchase price for the new furnace has not been finalized. At what purchase price would Cole Fyre be indifferent between purchasing the new furnace and continuing to use the old furnace? (4 points) 3. Cole Fyre is concerned about future demand for its medallions. For what 'production and sales' quantity would ColeFyre prefer to (i) keep the old furnace or (ii) purchase the new furnace? Assume the original purchase price for the new furnace. (6 points) 4. What other factors might Cole Fyre's manager consider in making the decision to keep or replace the furnace? (4 points) Problem 2 (20 points) ColeFyre makes cast-metal medallions. The current level of production and sales is 10,000 medallions per year. A key operation is molding the medallions in a high temperature furnace. Cole Fyre is thinking about replacing its older gas furnace with a newer, more energy-efficient solar model. Information related to the old and new furnaces follows: Old New Original cost $42,000 $80,000 Accumulated depreciation $7,000 Not acquired yet Book value $35,000 Not acquired yet Current disposal value $20,000 Not acquired yet Installation cost Not applicable $3,000 Annual operating cost per unit $2.40 $1.00 Useful life 6 years 5 years Current age Remaining useful life 5 years 5 years Terminal disposal value (in 5 years) $0 $0 Ignore the effect of income taxes and the time value of money. 1 year O years Required: (show your work) 1. Should ColeFyre purchase the new furnace? Provide support for your answer. (6 points) 2. Assume the purchase price for the new furnace has not been finalized. At what purchase price would Cole Fyre be indifferent between purchasing the new furnace and continuing to use the old furnace? (4 points) 3. Cole Fyre is concerned about future demand for its medallions. For what 'production and sales' quantity would ColeFyre prefer to (i) keep the old furnace or (ii) purchase the new furnace? Assume the original purchase price for the new furnace. (6 points) 4. What other factors might Cole Fyre's manager consider in making the decision to keep or replace the furnace? (4 points)
