Lukow Products is investigating the purchase of a piece of automated equipment that will save $120,000 each year in direct labor and inventory carrying costs
Lukow Products is investigating the purchase of a piece of automated equipment that will save $120,000 each year in direct labor and inventory carrying costs. This equipment costs $910,000 and is expected to have a 11-year useful life with no salvage value. The company's required rate of return is 10% on all equipment purchases. Management anticipates that this equipment will provide intangible benefits such as greater flexibility and higher-quality output that will result in additional future cash inflows.
Click here to view Exhibit 138-1 and Exhibit 138-2. to determine the appropriate discount factors) using table.
Required:
.1. What is the net present value of the piece of equipment before considering its intangible benefits?
2. What minimum dollar value per year must be provided by the equipment's intangible benefits to justify the $910,000 investment?
Homework Answers
| 1 | |||||
| Net present value = (120000*6.495)-910000= -130600 | |||||
| 2 | |||||
| Minimum dollar value= 130600/6.495= $20108 (rounded off) | |||||
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Lukow Products is investigating the purchase of a piece of automated equipment that will save $120,000 each year in direct labor and inventory carrying costs
Lukow Products is investigating the purchase of a piece of automated equipment that will save $130,000 each year in direct labor and inventory carrying costs
Lukow Products is investigating the purchase of a piece of automated equipment that will save $130,000 each year in direct labor and inventory carrying costs. This equipment costs $920,000 and is expected to have a 6-year useful life with no salvage value. The company's required rate of return is 11% on all equipment purchases. Management anticipates that this equipment will provide intangible benefits such as greater flexibility and higher-quality output that will result in additional future cash inflows. Click here to...
Exercise 13-4 Uncertain Future Cash Flows [LO13-4] Lukow Products is investigating the purchase of a piece...
Exercise 13-4 Uncertain Future Cash Flows [LO13-4] Lukow Products is investigating the purchase of a piece of automated equipment that will save $100,000 each year in direct labor and inventory carrying costs. This equipment costs $890,000 and is expected to have a 6-year useful life with no salvage value. The company’s required rate of return is 9% on all equipment purchases. Management anticipates that this equipment will provide intangible benefits such as greater flexibility and higher-quality output that will result...
Exercise 14-4 (Static) Uncertain Future Cash Flows [L014-4] Lukow Products Is Investigating the purchase of a...
Exercise 14-4 (Static) Uncertain Future Cash Flows [L014-4] Lukow Products Is Investigating the purchase of a plece of automated equipment that will save $400,000 each year in direct labor and Inventory carrying costs. This equipment costs $2,500,000 and is expected to have a 15-year useful life with no salvage value. The company's required rate of return is 20% on all equipment purchases. Management anticipates that this equipment will provide Intangible benefits such as greater flexibility and higher-quality output that will...
Exercise 14-4 (Algo) Uncertain Future Cash Flows [LO14-4]
Lukow Products is investigating the purchase of a piece of automated equipment that will save $110,000 each year in direct labor and inventory carrying costs. This equipment costs $820,000 and is expected to have a 7-year useful life with no salvage value. The company’s required rate of return is 7% on all equipment purchases. Management anticipates that this equipment will provide intangible benefits such as greater flexibility and higher-quality output that will result in additional future cash inflows. Click here to...
Lukow Products is investigating the purchase of a piece of automated equipment that will save $100,000...
Lukow Products is investigating the purchase of a piece of
automated equipment that will save $100,000 each year in direct
labor and inventory carrying costs. This equipment costs $750,000
and is expected to have a 7-year useful life with no salvage value.
The company’s required rate of return is 7% on all equipment
purchases. Management anticipates that this equipment will provide
intangible benefits such as greater flexibility and higher-quality
output that will result in additional future cash inflows.
Click here...
Case study 5: A piece of automated production equipment has a first cost of $120,000. The...
Case study 5: A piece of automated production equipment has a first cost of $120,000. The service life is 6 years, the anticipated salvage value is $10,000, and the annual maintenance costs are $4000. The equipment will produce at the rate of 10 units/h, each unit worth $2.20 in added revenue. One operator is required full time to tend the machine at a rate of $14.00/h. Assume that no overhead rates are applicable. Raw material costs equal $0.3/unit. Use a...
The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $120,000. The mach...
The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $120,000. The machine would replace an old piece of equipment that costs $30,000 per year to operate. The new machine would cost $12,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a salvage value of $40,000. The new machine would have a useful life of 10 years with no salvage value. Required: 1. What...
Saxon Products, Inc., is investigating the purchase of a robot for use on the company’s assembly...
Saxon Products, Inc., is investigating the purchase of a robot for use on the company’s assembly line. Selected data relating to the robot are provided below: Cost of the robot $ 2,000,000 Installation and software $ 490,000 Annual savings in inventory carrying costs $ 218,000 Annual increase in power and maintenance costs $ 38,000 Salvage value in 5 years $ 78,000 Useful life 5 years In addition to the data above, engineering studies suggest that use of the robot will...
2. Devon Corporation uses a discount rate of 8% in its capital budgeting. Partial analysis of...
2.
Devon Corporation uses a discount rate of 8% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 6 years has thus far yielded a net present value of -$502,141. This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment. (Ignore income taxes.) Click here to view Exhibit 13B-1 and Exhibit 13B-2 to determine...
“I’m not sure we should lay out $375,000 for that automated welding machine,” said Jim Alder,...
“I’m not sure we should lay out $375,000 for that automated
welding machine,” said Jim Alder, president of the Superior
Equipment Company. “That’s a lot of money, and it would cost us
$99,000 for software and installation, and another $5,500 every
month just to maintain the thing. In addition, the manufacturer
admits that it would cost $62,000 more at the end of three years to
replace worn-out parts.”
“I admit it’s a lot of money,”
said Franci Rogers, the...
Exercise 14-4 (Static) Uncertain Future Cash Flows [L014-4] Lukow Products Is Investigating the purchase of a plece of automated equipment that will save $400,000 each year in direct labor and Inventory carrying costs. This equipment costs $2,500,000 and is expected to have a 15-year useful life with no salvage value. The company's required rate of return is 20% on all equipment purchases. Management anticipates that this equipment will provide Intangible benefits such as greater flexibility and higher-quality output that will...
Lukow Products is investigating the purchase of a piece of
automated equipment that will save $100,000 each year in direct
labor and inventory carrying costs. This equipment costs $750,000
and is expected to have a 7-year useful life with no salvage value.
The company’s required rate of return is 7% on all equipment
purchases. Management anticipates that this equipment will provide
intangible benefits such as greater flexibility and higher-quality
output that will result in additional future cash inflows.
Click here...
Case study 5: A piece of automated production equipment has a first cost of $120,000. The service life is 6 years, the anticipated salvage value is $10,000, and the annual maintenance costs are $4000. The equipment will produce at the rate of 10 units/h, each unit worth $2.20 in added revenue. One operator is required full time to tend the machine at a rate of $14.00/h. Assume that no overhead rates are applicable. Raw material costs equal $0.3/unit. Use a...
The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $120,000. The machine would replace an old piece of equipment that costs $30,000 per year to operate. The new machine would cost $12,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a salvage value of $40,000. The new machine would have a useful life of 10 years with no salvage value. Required: 1. What...
2.
Devon Corporation uses a discount rate of 8% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 6 years has thus far yielded a net present value of -$502,141. This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment. (Ignore income taxes.) Click here to view Exhibit 13B-1 and Exhibit 13B-2 to determine...
“I’m not sure we should lay out $375,000 for that automated
welding machine,” said Jim Alder, president of the Superior
Equipment Company. “That’s a lot of money, and it would cost us
$99,000 for software and installation, and another $5,500 every
month just to maintain the thing. In addition, the manufacturer
admits that it would cost $62,000 more at the end of three years to
replace worn-out parts.”
“I admit it’s a lot of money,”
said Franci Rogers, the...
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