Question

As a result of improvements in product engineering, United Automation is able to sell one of its two milling machines. Both machines perform the same function but differ in age. The newer machine could be sold today for $69,500. Its operating costs are $20,600 a year, but in five years the machine will require a $18,700 overhaul. Thereafter operating costs will be $31,300 until the machine is finally sold in year 10 for $6,950.
The older machine could be sold today for $26,300. If it is kept, it will need an immediate $26,500 overhaul. Thereafter operating costs will be $34,900 a year until the machine is finally sold in year 5 for $6,950.
Both machines are fully depreciated for tax purposes. The company pays tax at 35%. Cash flows have been forecasted in real terms. The real cost of capital is 13%. (Use PV table.)

As a result of improvements in product engineering, United Automation is able to sell one of its two milling machines. Both m
0 0
Add a comment Improve this question Transcribed image text
Answer #1

Ans.

a)

Option 1 : Sell the newer machine & keep the older machine (with tax)

Years 0 1 2 3 4 5
Proceeds from sale of old machine        69,500.00
Tax on gain @ 35%     (24,325.00)
Operating costs (new machine)     (34,900.00)     (34,900.00)     (34,900.00)     (34,900.00)     (34,900.00)
Overhaul expense     (26,500.00)
Proceeds from sale of new machine         6,950.00
Tax on gain @35%         2,432.50
Cash Flow        18,675.00     (34,900.00)     (34,900.00)     (34,900.00)     (34,900.00)     (25,517.50)
PV factor @ 13%                        1      0.8849558      0.7831467      0.6930502      0.6133187      0.5427599
Present Value        18,675.00     (30,884.96)     (27,331.82)     (24,187.45)     (21,404.82)     (13,849.88)
Net Present Value     (98,983.93)

Equivalent Annual Cost (EAC) for 5 years

Present Value = EAC1 * PVAF @ 13% for 5 years

$98,983.93 = EAC1 * 3.5172313

EAC1 = $ 98,983.93 / 3.5172313 = $ 28,142.57

Option 2 : Sell the older machine & keep the newer machine (with tax)

Years 0 1 2 3 4 5 6 7 8 9 10
Proceeds from sale of old machine        26,300.00
Tax on gain @ 35%        (9,205.00)
Operating costs (new machine)     (20,600.00)     (20,600.00)     (20,600.00)     (20,600.00)     (20,600.00)     (31,300.00)     (31,300.00)     (31,300.00)     (31,300.00)     (31,300.00)
Overhaul expense     (18,700.00)
Proceeds from sale of new machine         6,950.00
Tax on gain @35%       (2,432.50)
Cash Flow        17,095.00     (20,600.00)     (20,600.00)     (20,600.00)     (20,600.00)     (39,300.00)     (31,300.00)     (31,300.00)     (31,300.00)     (31,300.00)     (26,782.50)
PV factor @ 13%                        1      0.8849558      0.7831467      0.6930502      0.6133187      0.5427599      0.4803185      0.4250606      0.3761599      0.3328848      0.2945883
Present Value        17,095.00     (18,230.09)     (16,132.82)     (14,276.83)     (12,634.37)     (21,330.47)     (15,033.97)     (13,304.40)     (11,773.80)     (10,419.30)       (7,889.81)
Net Present Value (123,930.85)

Equivalent Annual Cost (EAC) for 10 years

Present Value = EAC1 * PVAF @ 13% for 10 years

$123,930.85 = EAC1 * 5.4262435

EAC1 = $123,930.85 / 5.4262435 = $ 22,839.16

b)

Which machine should united automation sell?

Sell the old machine.

Reason being the Equivalent Annual Cost is low.

Add a comment
Know the answer?
Add Answer to:
As a result of improvements in product engineering, United Automation is able to sell one of...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • As a result of improvements in product engineering, United Automation is able to sell one of...

    As a result of improvements in product engineering, United Automation is able to sell one of its two milling machines. Both machines perform the same function but differ in age. The newer machine could be sold today for $72,500. Its operating costs are $23,000 a year, but at the end of five years, the machine will require a $18,500 overhaul (which is tax deductible). Thereafter, operating costs will be $31,500 until the machine is finally sold in year 10 for...

  • As a result of improvements in product engineering, United Automation is able to sell one of...

    As a result of improvements in product engineering, United Automation is able to sell one of its two milling machines. Both machines perform the same function but differ in age. The newer machine could be sold today for $63,500. Its operating costs are $21,800 a year, but in five years the machine will require a $19,100 overhaul. Thereafter operating costs will be $30,900 until the machine is finally sold in year 10 for $6,350. The older machine could be sold...

  • As a result of improvements in product engineering, United Automation is able to sell one of...

    As a result of improvements in product engineering, United Automation is able to sell one of its two milling machines. Both machines perform the same function but differ in age. The newer machine could be sold today for $75,500. Its operating costs are $23,400 a year, but in five years the machine will require a $18,300 overhaul. Thereafter operating costs will be $31,700 until the machine is finally sold in year 10 for $7,550. The older machine could be sold...

  • As a result of improvements in product engineering, United Automation is able to sell one of...

    As a result of improvements in product engineering, United Automation is able to sell one of its two milling machines. Both machines perform the same function but differ in age. The newer machine could be sold today for $63,500. Its operating costs are $21,800 a year, but in five years the machine will require a $19,100 overhaul. Thereafter operating costs will be $30,900 until the machine is finally sold in year 10 for $6,350 The older machine could be sold...

  • As a result of improvements in product engineering, United Automation is able to sell one of...

    As a result of improvements in product engineering, United Automation is able to sell one of its two milling machines. Both machines perform the same function but differ in age. The newer machine could be sold today for $60,500. Its operating costs are $21,400 a year, but at the end of five years, the machine will require a $19,300 overhaul (which is tax deductible). Thereafter, operating costs will be $30,700 until the machine is finally sold in year 10 for...

  • As a result of improvements in product engineering, United Automation is able to sell one of...

    As a result of improvements in product engineering, United Automation is able to sell one of its two milling machines. Both machines perform the same function but differ in age. The newer machine could be sold taday for 75,500. Its operating costs are $23,400 a year, but in five years the machine will require a $18,300 overhaul. Thereafter operating costs will be $31,700 until the machine is finally sold in year 10 for $7,550. The older machine could be sold...

  • 10.00 points As a result of improvements in product engineering, United Automation is able to sell...

    10.00 points As a result of improvements in product engineering, United Automation is able to sell one of its two milling machines. Both machines perform the same function but differ in age. The newer machine could be sold today for $65,000. Its operating costs are $22,000 a year, but in tive years the machine will require a $19,000 overhaul. Thereafter operating costs will be $31,000 until the machine is inally sold in year 10 for $6,500. The older machine could...

  • 10.00 points As a result of improvements in product engineering, United Automation is able to sell...

    10.00 points As a result of improvements in product engineering, United Automation is able to sell one of its two milling machines. Both machines perform the same function but differ in age. The newer machine could be sold today for $65,000. Its operating costs are $22,000 a year, but in tive years the machine will require a $19,000 overhaul. Thereafter operating costs will be $31,000 until the machine is inally sold in year 10 for $6,500. The older machine could...

  • Company A is able to sell one of its two milling machines. Both machines perform the...

    Company A is able to sell one of its two milling machines. Both machines perform the same function but differ in age. The newer machine could be sold today for $66,500. Its operating costs are $22,200 a year, but in five years the machine will require a $18,900 overhaul. Thereafter operating costs will be $31,100 until the machine is finally sold in year 10 for $6,650.The older machine could be sold today for $26,100. If it is kept, it will...

  • Calculate the equivalent annual costs of (a) overhauling and operating the Maracas for 12 more years...

    Calculate the equivalent annual costs of (a) overhauling and operating the Maracas for 12 more years (with and without the new engine and control system) and (b) buying and operating the proposed replacement vessel for 20 years. You should use the real discount rate for this analysis. Based on your answer, what should RNI do? Mini Case #1: Capital Budgeting at Rio Negro, Inc. Assignment Overview Rio Negro, Inc. (RNI) is in the business of transporting cargo between ports in...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT