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Please show the working for the answers. Thanks! The Musta Corporation is evaluating the possibility of replacing its old machine with a more advanced model.
Please show the working for the answers. Thanks!
The Musta Corporation is evaluating the possibility of replacing its old machine with a more advanced model. Information on the existing machine and the new model follows: Existing machine New machine Original cost $200,000 $400,000 Market value now 80,000 0 20,000 Market value in year 5 Annual cash operating costs 40,000 10,000 Remaining life 5 yrs. Syrs. a) What is the major opportunity cost associated with the continued use of the existing machine b) During the meeting to examine the pros and cons of replacing the current machine, a manager in Musta Corp. mentioned that the $80,000 current market value of the existing machine is a sunk cost because Musta already purchased the machine and there is nothing the firm can do to change this value. Therefore, it should not be considered in the decision making. What is your opinion on this point of view? Do you agree or disagree? Explain. c) If the company buys the new machine and disposes of the existing machine, how is the corporate profit over the five-year life of the new machine compared to if they choose to keep the existing machine? (ignore all issues related to Present Value and other qualitative factors. Only focus your analysis on the given info) d) Based on your analysis, which option should Musta choose? Scenario: MustA's management team after several meetings have found out this following additional info Musta is experiencing the booming phase of business; the number of units sold is on a steady increasing trend. The company is currently selling 100,000 products a year (up from 90,000 products last year) . The company is expected to sell at least 120,000 products next year, 140,000 products in year 2 160,000 products in year 3, 180,000 products in year 4, and 200,000 products in year 5. Currently, the existing machine can produce 100,000 products a year. A new machine is obviously much faster and can produce at least 200,000 products a year. . How would your answer from d) change under the above scenario? Provide detailed explanation with analysis, example and/or calculation (if needed) to support your Step by Step Solution
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