Vachon company

The Vachon company is considering a proposal that suggests replacing a machine to keep cows warm. The company operates a large dairy farm in the Cornwall area of Ontario and serves the Ottawa area.

The machine the company intends to buy from a supplier sells for $ 140,000 and has a useful life of 5 years after which it can be sold for $ 14,000. If this piece of equipment is purchased, its annual operating costs will be $ 50,000 compared to operating costs of $ 80,000 for the current machine, a savings of $ 30,000 per year. This saving is mainly due to the fact that the new equipment requires much less energy than the current equipment. If the new equipment is not purchased, the equipment currently in place can still be used for 5 years after which it can be sold for $ 4,000. The current equipment has a market value of $ 35,000 and the supplier is prepared to purchase it at that price which would bring the net outlay for the new equipment to $ 105,000.

The technical service was therefore tasked with preparing a study which would help managers when deciding what action to take. The conclusions of the study are as follows: the capital cost is 10%. The current equipment cost $ 95,000 and the accumulated depreciation on this equipment is $ 56,000.

Table 1 in the appendix shows data taken from the company's financial statements for the last year.

Question :

1. What decision would you advise the president of the company Vachon? (Prepare as a report).

2. As a sensitivity analysis, the chairman would like to know what is the indifference threshold between the two options? (To calculate the indifference threshold, try calculating the amount of annual savings so that the two options are equal)

Table 1

Condensed statement of results for last year

Net sales $ 10,728,426

Fees and costs. 8,277,294

Income before tax. 2,451,132

Provision for income taxes ..1 245 430

Net profit ... $ 1,205,702

Summary Report

at the end of last year

ACTIVE

Current assets . $ 6,012,698

Fixed assets (net) ..8 478 420

Other asset . 302 982

Total assets . 14,884,100

LIABILITIES AND SHAREHOLDERS

Current liabilities $ 1,860,654

3% mortgage bonds . 1,000,000

Share capital: . 2,000,000

Non-distributed profits . 10 023 446

Total liabilities and equity . $ 14,884,100