King Catering makes cutlery for restaurants and hotels, it is currently using a model 26XL shaping machine to make one of its products. It bought the equipment four years ago for $165,000. The present book value is $99,000, its present market value is $90,000.

We are January 1^st 2022: The company is expected to have a large increase in demand for the product and is anxious to expand its productive capacity.

There are two possibilities under consideration:

1. Purchase another model 26XL shaping machine to operate along with the currently owned machine for a price of $180,000.

2. Purchase a new better performing machine the model C60 with double capacity of 26XL for $250,000, and use the 26XL as standby equipment.

1. Both models have a 10 year life when bought new, with straight line depreciation.They have a negligible scrap value and it can be ignored.

2. If the company decides not to buy the model C60, then the old 26XL model will have to be replaced in 6 years at an estimated cost of $200,000. The replacement machine will have a market value of about $100 000 when it is four years old.

3. Production in units are estimated to be:

2022: 20,000 units

2023: 30,000 units

2024: 40,000 units

2025 to 2031 : 45,000 units per year

4. Variable costs per unit for model 26XL are $0.36 for direct materials , $0.50 for direct labor, and $0.04 for supplies and lubricant per unit.

5. Variable costs per unit for model C60 are $0.40 for direct material , $0.22 for direct labor, and $0.08 for supplies and lubricant per unit.

6. Model 26XL is less costly to maintain, with annual maintenance and repair of $3000.

7. Repair and maintenance on Model C60 with a model 26XL used as standby would total $4600 per year.

The required rate of return for the project is 10%.

1) Using NPV, which alternative should be used? SHOW COMPUTATIONS (25 points)

2) Suppose that the cost of labor increases by 30%, how would it change your answer?

SHOW COMPUTATIONS (20 points)

3) Suppose that the cost of direct materials increase by 50%, how would it change your answer?SHOW COMPUTATIONS (20 points)

4) Suppose that a tax rate of 30% is applied, how would it change your answer?

SHOW COMPUTATIONS (25 points)

5) How would an inflation going up to 15% affect your capital budgeting decision? Explain without computations. (10 points)

All assignment will be on paper with cover page AND YOUR NAME, NO PDF FIL