PROBLEM ONE (10 POINTS) A component product is presently being manufactured using equipment that is fully depreciated. With suitable annual overhauls and an upfront cost of $20,000, it can be used by the company for another three years. The cost of these overhauls is expected to be $40,000 per year (payable at the beginning of each year), and at the end of the third year the overhauled machine is expected to have a salvage value of $10,000. A new machine can be purchased for $134,350 cash with an expected life of three years and no expected salvage value at the end of three years. The projected sales and cost of operations for both the old and new machines for each of the next three years follow. Assume that the time value of money for this company is 10% per year, and ignore income taxes. Required a) Should the old machine be overhauled or should the new equipment be acquired? Explain. b) If the component product can be purchased at a cost of $10.30 per unit from outside suppliers, should it then be purchased or be manufactured internally? Explain. Assume that payments to external suppliers are made at the end of each year. c) At what level of output (unit sales per year) would management be indifferent to (1) buying the component from outside suppliers at $10.30 per unit, and (2) manufacturing it internally on the new equipment? PROBLEM TWO (10 POINTS) ommunication Case Viable Corp. purchases machines for use in its plant. Machine TypeA is typical of these ma- chines. Currently, Viable is considering the purchase of a new TypeA machine. Two different brand names are being considered. Viable expects a 12% return on its plant investments. Brand ABrand B Cost (cash basis) PROBLEM TWO (10 POINTS) ommunication Case Viable Corp. purchases machines for use in its plant. Machine TypeA is typical of these ma- chines. Currently, Viable is considering the purchase of a new TypeA machine. Two different brand names are being considered. Viable expects a 12% return on its plant investments. Brand ABrand B Cost (cash basis)... .......$100,000$90,000 Operating expense to operate the machine (per year)... $7,000$8,000 Estimated useful life (years).. ...88 Estimated residual value (% of cost)... ..20%10% Required a.Compute the present value of the costs of the two alternative brands of machines. (Assume that all variables, other than the four listed above, are identical for both brands.) b. Which machine should Viable purchase? Are any other factors besides our computations relevant? Prepare the response in memo form to senior management. Viable Corp. purchases machines for use in its plant. Machine Type A is typical of these ma chines. Currently, Viable is considering the purchase of a new Type A machine. Two different brand names are being considered. Viable expects a 12% retum on its plant investments Brand A Brand B Costa) Operating expense to operate the machine per year Estimated 7.000 S8.000 Viable Corp. purchases machines for use in its plant. Machine Type A is typical of these ma chines. Currently, Viable is considering the purchase of a new Type A machine. Two different brand names are being considered. Viable expects a 12% return on its plant investments Cost (cash basis).... Operating expense to operate the machine (per year). Estimated useful life (years). Estimated residual value (% of cost) Brand A Brand B $100,000 $90,000 $7,000 $8,000 8 8 20% 10% Required a) Compute the present value of the costs of the two alternative brands of machines (Assume that all variables, other than the four listed above, are identical for both brands). b) Which machine should Viable purchase? Are any other factors besides our computations relevant? Prepare the response in memo form to senior management
