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(SO 2) Calculate the net present value and apply the decision rule. P13-38B A company currently sells 850,000 units per year of a product to
(SO 2) Calculate the net present value and apply the decision rule. P13-38B A company currently sells 850,000 units per year of a product to one customer at a price of $0.80 per unit. The customer requires that the product be exclusive and expects no increase in sales during the next year. The product is manufactured with a machine that was purchased seven years ago at a cost of $500,000. Currently, the machine has a book value of $150,000 but its market value is only $30,000. The machine is expected to last another three years, after which it will have no salvage value. The annual activity is 200,000 machine hours and each product requires 0.20 machine hours. Fixed overhead includes depreciation. Last year, the production costs per unit were as follows: Direct materials Direct labour Variable overhead Fixed overhead Total cost per unit $0.20 0.12 0.08 0.15 $0.55 The company president is considering replacing the old machine with a new one that would cost $400,000. The new machine is expected to last five years. At the end of that period, the salvage value will be $50,000. The president expects to save 10% of the company's total variable costs with the new machine Instructions Assume that the company's desired rate of return is 12%. Using the net present value method, determine if the company should replace the old machine with the new one, and briefly explain why or why not. Show your calculations. Investment NPV $(219,065) (adapted from CGA-Canada, now CPA Canada)
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