Question
The management of Kangaroo Manufacturing Company is currently evaluating a proposal to purchase a new, innovative drill press as a replacement for a less efficient
The management of Kangaroo Manufacturing Company is currently evaluating a proposal to purchase a new, innovative drill press as a replacement for a less efficient piece of similar equipment, which would then be sold. The cost of the equipment, including delivery and installation, is $270,000. If the equipment is purchased, Dusseldorf will incur a $7,500 cost in removing the present equipment and revamping service facilities. The present equipment has a book value of $150,000 and a remaining useful life of ten years. Because of new technical improvements that have made the present equipment obsolete, it now has a disposal value of only $60,000. Management has provided the following comparison of manufacturing costs:
Additional information follows:
Management believes that if the current equipment is not replaced now, it will have to wait ten years before replacement is justifiable.
Both pieces of equipment are expected to have a negligible salvage value at the end of ten years.
Management expects to sell the entire annual production of 400,000 units.
The companys cost of capital is 12 percent.
Required
Using differential cash flow, evaluate the desirability of purchasing the new equipment.
Please use Excel spreadsheet with formulas so I can better understand how to do this. Thank you!
Present Equipment 400,000 $0.113 $15,000 New Equipment 400,000 $0.075 $27,000 Annual costs Overhead Depreciation (10% of asset's book value).?. $72,000 $30,000Step by Step Solution
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