Tat e 70% Popr'n , QUESTION 4 6,000 T4,010 The Midtown Cafeteria employs five people to operate antiquated dishwashing equipment The cost of wages for these people and for maintenance of the equipment is $85.000 perut year. Management is considering the purchase of a single, highly automated dishwashine machine that would cost $140,000 and have a useful life of 12 years. This machine would require the services of only three people to operate at a cost of $48,000 per year. A maintenance contract on the machine would cost an additional $2,000 per year. New water jets would be needed on the machine in six years at a total cost of $15,000. Ourinho still tase the The old equipment is fully depreciated and has no resale value. The new machine will have a salvage value of $9,000 Jat the end of its 12-year useful life. For tax purposes, the company computes depreciation deductions assuming zero salvage value and uses straight- line depreciation. The new dishwashing machine would be depreciated over seven years. Management requires a 14% after-tax return on all equipment purchases. The company's tax rate is 30%. (9 ) Required40 ) (2 20 (1) Determine the before tax net annual cost savings that the new dishwashing machine will provide (10 marks) (ii) Using the date from (i) above and other data from the exercise, compute the new dishwashing machine's net present value. Round all dollar amounts to the nearest whole dollar. Would you recommend that it be purchased? (15 marks) Page 3 of 12 QUESTION 2 Stobo Limited is a well-known national chain of high street chemist. Its traditional markets of Pharmaceuticals and beauty products are becoming increasingly compeu uue to the aggressive entry of certain supermarkets. To counter this it is considering services to the public. It plans to make more effective use of some of retail space or storerooms by introducing some sort of personal healthcare service. en chosen in specially selected locations for a five-year pilot scheme Stobo intends to choose one of the following three alternative possibilities: SR Stress Relief, including aromatherapy, message and reflexology OHC Oral Hygiene and chiropody PF Personal Fitness using multigym equipment Each of these will involve an initial cash outlay on appropriate equipment and the employment of specialist personnel. Market research and a financial analysis hay carried out for each alternative; an extract of the findings is shown below. OHC PF (all figures in $'000) Initial cash outlay SR 44 40 10 Net cash flow Year 1 Year 2 Year 3 Year 4 Year 5 14 60 Internal rate of return 13% 13% 11% quired: Calculate the payback period for each alternative. Calculate the net present value of each alternative if Stobo's cost of car
