Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Problem 16-44 Net Present Value; Qualitative Issues (Section 1) (LO 16-1, 16-3) Special People Industries (SPI) is a nonprofit organization that employs only people with

Problem 16-44 Net Present Value; Qualitative Issues (Section 1) (LO 16-1, 16-3)

Special People Industries (SPI) is a nonprofit organization that employs only people with physical or mental disabilities. One of the organizations activities is to make cookies for its snack food store. Several years ago, Special People Industries purchased a special cookie-cutting machine. As of December 31, 20x0, this machine will have been used for three years. Management is considering the purchase of a newer, more efficient machine. If purchased, the new machine would be acquired on December 31, 20x0. Management expects to sell 300,000 dozen cookies in each of the next six years. The selling price of the cookies is expected to average $1.15 per dozen. Special People Industries has two options: continue to operate the old machine or sell the old machine and purchase the new machine. No trade-in was offered by the seller of the new machine. The following information has been assembled to help management decide which option is more desirable.

Old Machine New Machine
Original cost of machine at acquisition $ 80,000 $ 120,000
Remaining useful life as of December 31, 20x0 6 years 6 years
Expected annual cash operating expenses:
Variable cost per dozen $ 0.38 $ 0.29
Total fixed costs $ 21,000 $ 11,000
Estimated cash value of machines:
December 31, 20x0 $ 40,000 $ 120,000
December 31, 20x6 $ 7,000 $ 20,000

Assume that all operating revenues and expenses occur at the end of the year. Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.) Required: 1-a. Use the net-present-value method to compute the net-present-value for the old machine and the new machine. The organization's hurdle rate is 16 percent. 1-b. Determine whether Special People Industries should retain the old machine or acquire the new machine.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

A One Year Accounting Course

Authors: Trevor Gambling

21st Edition

0080130275, 9780080130279

More Books

Students also viewed these Accounting questions

Question

Is there administrative support?

Answered: 1 week ago

Question

What was the positive value of Max Weber's model of "bureaucracy?"

Answered: 1 week ago