Question
Queen Catering makes cutlery for restaurants and hotels, it is currently using a model 500 shaping machine to make one of its products. It bought
Queen Catering makes cutlery for restaurants and hotels, it is currently using a model 500 shaping machine to make one of its products. It bought the equipment three years ago for $165,000. The present book value is $99,000, its present market value is $90,000. We are January 1st : The company is expected to have a large increase in demand for the product and is anxious to expand its productive capacity.
There are two possibilities under consideration:
1. Purchase another model 500 shaping machine to operate along with the currently owned machine for a price of $180,000. 2. 2. Purchase a new better performing machine the model 1000 with double capacity of model 500 for $250,000, and use the model 500 as standby equipment.
Both models have a 10 year life when bought new, with straight line depreciation. If the company decides not to buy the model 1000, then the old 500 model will have to be replaced in 6 years at an estimated cost of $200,000. The replacement machine will be sold at the end of the tenth year for $100,000 when it is four years old.
Production in units are estimated to be: Year 1: 20,000 units
Year 2: 30,000 units
Year 3: 40,000 units
Year 4-10 : 45,000 units per year
Variable costs per unit for model 500 are $0.36 for direct materials , $0.50 for direct labor, and $0.04 for supplies and lubricant. Variable costs per unit for model 1000 are $0.40 for direct material , $0.22 for direct labor, and $0.08 for supplies and lubricant.
Model 500 is less costly to maintain, with annual maintenance and repair of $3000 Repair
and maintenance on Model 1000 with a model 500 used as standby would total $4600 per year.
The required rate of return for the project is 18%.
QUESTION 1 Using NPV, which alternative should be used? SHOW COMPUTATIONS
QUESTION 2 Suppose that a tax rate of 30% is applied, how would it change your answer? SHOW COMPUTATIONS
QUESTION 3 If the rate of inflation is now 20% , how would it affect your RRR ? Recompute the NPV with the new RRR. (without Taxes)
Please show specific computations for each questions!!! many thanks
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