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Mallette Manufacturing, Inc., produces washing machines, dryers, and dishwashers. Because of increasing competition, Mallette is considering investing in an automated manufacturing system. Since competition is
Mallette Manufacturing, Inc., produces washing machines, dryers, and dishwashers. Because of increasing competition, Mallette is considering investing in an automated manufacturing system. Since competition is most keen for dishwashers, the production process for this line has been selected for initial evaluation. The automated system for the dishwasher line would replace an existing system purchased one year ago for $ million Although the existing system will be fully depreciated in nine years, it is expected to last another years. The automated system would also have a useful life of years.
The existing system is capable of producing dishwashers per year. Sales and production data using the existing system are provided by the Accounting Department:
Sales per year units
Selling price $
Costs per unit:
Direct materials
Direct labor
Volumerelated overhead
Direct fixed overhead
All cash expenses with the exception of depreciation, which is $ per unit. The existing equipment is being depreciated using straightline with no salvage value considered.
The automated system will cost $ million to purchase, plus an estimated $ million in software and implementation. Assume that all investment outlays occur at the beginning of the first year. If the automated equipment is purchased, the old equipment can be sold for $ million.
The automated system will require fewer parts for production and will produce with less waste. Because of this, the direct material cost per unit will be reduced by percent. Automation will also require fewer support activities, and as a consequence, volumerelated overhead will be reduced by $ per unit and direct fixed overhead other than depreciation by $ per unit. Direct labor is reduced by percent. Assume, for simplicity, that the new investment will be depreciated on a pure straightline basis for tax purposes with no salvage value. Ignore the halflife convention.
The firm's cost of capital is percent, but management chooses to use percent as the required rate of return for evaluation of investments. The combined federal and state tax rate is percent.
The present value tables provided in Exhibit B and Exhibit B must be used to solve the following problems.
Required:
Compute the net present value for the old system and the automated system. Enter your answers in thousands.
Old system $fill in the blank
New system $fill in the blank
Which system would the company choose?
Repeat the net present value analysis of Requirement using percent as the discount rate. Enter your answers in thousands.
Old system $fill in the blank
New system $fill in the blank
Upon seeing the projected sales for the old system, the marketing manager commented: Sales of units per year cannot be maintained in the current competitive environment for more than one year unless we buy the automated system. The automated system will allow us to compete on the basis of quality and lead time. If we keep the old system, our sales will drop by units per year. Repeat the net present value analysis, using this new information and a percent discount rate. Enter your answers in thousands.
Old system $fill in the blank
An industrial engineer for Mallette noticed that salvage value for the automated equipment had not been included in the analysis. He estimated that the equipment could be sold for $ million at the end of years. He also estimated that the equipment of the old system would have no salvage value at the end of years. Repeat the net present value analysis using this information, the information in Requirement and a percent discount rate.
New system
to NPV $fill in the blank
Old system
to NPV $fill in the blank
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