Jerome Harrington manages the Butte plant of Montana Manufacturing (MM). He has been | ||||||||
approached by a representative of Futuristic Engineering regarding the possible replacement | ||||||||
of an important piece of production equipment. While the representative has made some | ||||||||
compelling arguments in favor of replacing the 3-year-old equipment (notably an increase in | ||||||||
efficiency), Harrington is hesitant. He is hoping to be promoted next year to manager of a | ||||||||
larger, more strategic plant in Missoula, and he knows that the net income reported on this | ||||||||
year's Income Statement for Butte will be a key factor in that decision. Data provided are: | ||||||||
* The original equipment was purchased for $1,020,000 three years ago. It had an estimated | ||||||||
useful life of 5 years, with zero salvage value. The current market value is $244,800. MM uses | ||||||||
straight-line depreciation. | ||||||||
*The new equipment will cost $612,000, with a 2-year estimated useful life and a salvage | ||||||||
value of zero. | ||||||||
*The new equipment, being more efficient, will reduce utility costs by $119,000 annually, and | ||||||||
will reduce direct material costs by $102,000 annually. | ||||||||
Required: | ||||||||
(1) Which alternative would Harrington choose, given his personal aspirations? Show your | ||||||||
calculations to justify your answer. | ||||||||
(2) Which alternative is best for the company over the two-year timeframe? Show your | ||||||||
calculations to justify your answer. | ||||||||
(3) EXTRA CREDIT: at what price would Harrington be willing to purchase the new equipment | ||||||||
now? |
Jerome Harrington manages the Butte plant of Montana Manufacturing (MM). He has been approached by a...
Sean Fitzpatrick manages the Peoria plant of Garcia Manufacturing. A representative of Darien Engineering approaches Fitzpatrick about replacing a large piece of manufacturing equipment that Garcia uses in its process with a more efficient model. While the representative made some compelling arguments in favor of replacing the 3-year-old equipment, Fitzpatrick is hesitant. Fitzpatrick is hoping to be promoted next year to manager of the larger Detroit plant, and he knows that the accrual-basis net operating income of the Peoria plant...