Kevin Cooper Inc. is considering a proposal to acquire a new piece of manufacturing equipment . The new equipment will provide operating efficiencies in direct labour and direct materials usage . Direct labour time is expected to decrease by 10% and direct material cost expected to decrease by 20% . In addition , the new machine will increase production and sales by 10,000 units per year. Current production and sales are 80,000 units per year.

The new equipment will cost $2,000,000 and will be purchased at the beginning of 2015. The sale price and total unit cost (using the existing old equipment ) are :

Sale price per unit. $60

Direct materials. $15

Direct labour (1 hour x $12). $12

Variable overhead ( 1 hour x $13). $13

Fixed overhead (1 hour $5). $5

Total unit cost $ 45

The old equipment has a book value of $80,000 but Kevin Cooper Inc. estimates its fair market value to be $100,000. The new equipment will have a disposal value of $150,000 after its expected economic life of 10 years. Straight-line depreciation is used for accounting purposes. Kevin Cooper Inc. cost of capital is 12% and has a 40% tax rate. The new equipment will require an increase in working capital of $100,000 when the equipment is put in place and an increase in working capital of $80,000 at the end of the 5th year.

Required- Determine if Kevin Cooper Inc should acquire the new manufacturing equipment. Using this format:

Existing New

Selling price

Direct material

Direct labor

Variable overhead

Contribution margin

Sales and production

Total CM

Less: Depreciation

Less fixed overhead

Operating Income

Taxes @ 40%

Net Income

Add: Depreciation

Cash flow