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.