Question
Problem16-44 NetPresentValue;QualitativeIssues(Section1) (LO16-1,16-3) 1.Oldmachine,netpresentvalue:$(494,605) SpecialPeopleIndustries(SPI)isanonprofitorganizationthatemploysonlypeoplewithphysicalormentaldisabilities.Oneoftheorganization'sactivitiesistomakecookiesforitssnackfoodstore.Severalyearsago,SpecialPeopleIndustriespurchasedaspecialcookie-cuttingmachine.AsofDecember31,20x0,thismachinewillhavebeenusedforthreeyears.Managementisconsideringthepurchaseofanewer,moreefficientmachine.Ifpurchased,thenewmachinewouldbeacquiredonDecember31,20x0.Managementexpectstosell300,000dozencookiesineachofthenextsixyears.Thesellingpriceofthecookiesisexpectedtoaverage$1.15perdozen. SpecialPeopleIndustrieshastwooptions:continuetooperatetheoldmachineorselltheoldmachineandpurchasethenewmachine.Notrade-inwasofferedbythesellerofthenewmachine.Thefollowinginformationhasbeenassembledtohelpmanagementdecidewhichoptionismoredesirable. Old MachineNew MachineOriginalcostofmachineatacquisition $80,000$120,000RemainingusefullifeasofDecember31,20x0 6years6yearsExpectedannualcashoperatingexpenses:Variablecostperdozen $.38$.29Totalfixedcosts $21,000$11,000Estimatedcashvalueofmachines:December31,20x0 $40,000$120,000December31,20x6 $7,000$20,000 page732 Assumethatalloperatingrevenuesandexpensesoccurattheendoftheyear. Required: Usethenet-present-valuemethodtodeterminewhetherSpecialPeopleIndustriesshouldretaintheoldmachineoracquirethenewmachine.Theorganization'shurdlerateis16percent. Independentofyouranswertorequirement(1),supposethequantitativedifferencesaresoslightbetweenthetwoalternativesthatmanagementisindifferentbetweenthetwoproposals.WriteamemotothepresidentofSPIthatidentifiesanddiscussesanynonquantitativefactorsthatmanagementshouldconsider.
Problem16-44
NetPresentValue;QualitativeIssues(Section1)
(LO16-1,16-3)
1.Oldmachine,netpresentvalue:$(494,605)
SpecialPeopleIndustries(SPI)isanonprofitorganizationthatemploysonlypeoplewithphysicalormentaldisabilities.Oneoftheorganization'sactivitiesistomakecookiesforitssnackfoodstore.Severalyearsago,SpecialPeopleIndustriespurchasedaspecialcookie-cuttingmachine.AsofDecember31,20x0,thismachinewillhavebeenusedforthreeyears.Managementisconsideringthepurchaseofanewer,moreefficientmachine.Ifpurchased,thenewmachinewouldbeacquiredonDecember31,20x0.Managementexpectstosell300,000dozencookiesineachofthenextsixyears.Thesellingpriceofthecookiesisexpectedtoaverage$1.15perdozen.
SpecialPeopleIndustrieshastwooptions:continuetooperatetheoldmachineorselltheoldmachineandpurchasethenewmachine.Notrade-inwasofferedbythesellerofthenewmachine.Thefollowinginformationhasbeenassembledtohelpmanagementdecidewhichoptionismoredesirable.
Old
MachineNew
MachineOriginalcostofmachineatacquisition
$80,000$120,000RemainingusefullifeasofDecember31,20x0
6years6yearsExpectedannualcashoperatingexpenses:Variablecostperdozen
$.38$.29Totalfixedcosts
$21,000$11,000Estimatedcashvalueofmachines:December31,20x0
$40,000$120,000December31,20x6
$7,000$20,000
page732
Assumethatalloperatingrevenuesandexpensesoccurattheendoftheyear.
Required:
- Usethenet-present-valuemethodtodeterminewhetherSpecialPeopleIndustriesshouldretaintheoldmachineoracquirethenewmachine.Theorganization'shurdlerateis16percent.
- Independentofyouranswertorequirement(1),supposethequantitativedifferencesaresoslightbetweenthetwoalternativesthatmanagementisindifferentbetweenthetwoproposals.WriteamemotothepresidentofSPIthatidentifiesanddiscussesanynonquantitativefactorsthatmanagementshouldconsider.
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