Question

The Armstrong Manufacturing Company is considering two projects, however only one project can be chosen. Prepare an incremental analysis using the data provided. Include internal rate of return (IRR) for each alternative. Prepare a report to be presented to vice-president of manufacturing with your recommendation. The company uses a depreciation. The company’s effective income tax rate is 35%.

The Armstrong Manufacturing Company is considering two projects, however only one project can be chosen. Prepare an incremental analysis using the data provided. Include in your presentation the net income, net cash flow, presen worth (PW) and the internal rate of return (IRR) for cach alternative. Prepare a report to be presented to the vice-president of manufacturing with your recommendation. The company uses a MARR of 8% and depreciates its assets using MACRS. Use 7-year MACRS for depreciation. The company's effective income tax rate is 35% Project 1 data Equipment cost: Four grinders at $450,000 each and a useful life of 8 years. The grinders are subject to a sales tax at 6.5%. 'The total cost of the freight and handling is expected to be $30,000. The total cost to install all four grinders is $80,000. Testing and tartup costs to place the equipment in service are estimated to be $30,000. It is estimated that the equipment can be sold for a total of $95,000 at the end of the project. There will be one operator per grinder at a rate of $31.50 per hour. The plant operates 3000 hours per year. Maintenance labor costs are estimated to be 30% of operting hours at $20.00 per hour. Operating supplies are estimated to be S115,000 per year Manufacturing overhead is expected to be an additional $245,000 per year Revenues are expected to be $1,040,000 for the first year as a result of this project and will increase by 3% each year thereafter Project 2 data Equipment cost: Four honing machines at $225,000 each and a useful life of 8 years. The honing machines are subject to a sales tax at 6.5%. The total cost for freight and handling is expected to be $25,000. The total cost to install all four honing machines is $75,000. Testing and startup costs to place the equipment in service are estimated to be $35,000. It is estimated that the equipment can be sold for a total of $90,000 at the end of the project. There will be one operator per honing machine at a rate of $28.50 per hour and one helper per machine at a rate of $18.75 per hour. The plant operates 3000 hours per year. Maintenance labor costs are estimated to be 20% of operting hours at $18.00 per hour. Operating supplies are estimated to be $32,000 per year. Manufacturing overhead is expected to be $160,000 per year. Annual revenues are expected to be $1,000,300 per year as a result of the project.

Answer 1

Particulars Equipment Cost Purchase price Sales Tax @ 6.5% Freight and handling Installation charges Testing and startup charges Total purchase cost Project 1 Project2 Amount Working calculation AmountWorking calculation $18,00,0004*450000 $9,00,0004225000 $1,17,000| 4*450000x65% $58,500|4" 225000x6.5% $25,000 $75,000 $35,000 $30,000 $80,000 $30,000 $20,57,000 $10,93,500 Life 7 years for Life 7 years for $2,93,857 depreciation $1,56,214 depreciation Depreciation PA Scrap value at end of life Operating cost per annum Operator cost Mainenance cost Operating suppies MFG overheads Total operating cost per annum $6,96,600 Operating revenue per annum $10,40,000 $95,000 $90,000 $2,64,600 3000*4*0.7 31.5 $4,53,600 3000*4*0.8* (28.5+18.75) $72,0003000*4*0.3*20 $1,15,000 $2,45,000 $43,200 3000*4*0.2*18 $32,000 $1,60,000 $6,88,800 $10,00,300

Project 1 8 Total Year Operating Revenue Operating Cost Depreciation PA Net income before tax Income tax @ 35% Net income after tax Add: Depreciation 4 5 7 $10,40,000 $10,71,200 $11,03,336 $11,36,436 $11,70,529 $12,05,645 $12,41,814 $12,79,069 $92,48,029 $6,96,600$6,96,600$6,96,600$6,96,600$6,96,600$6,96,600 $6,96,600 $6,96,600 $55,72,800 $20,57,000 $49,543 $80,743 $1,12,879 $1,45,979 $1,80,072$2,15,188$2,51,357 $5,82,469 $16,18,229 17,340$28,260$39,508 $51,093 $63,025 $75,316$87,975 $2,03,864 $5,66,380 32,203$52,483 $73,371 $94,886 $1,17,047 $1,39,872 $1,63,382 $3,78,605 $10,51,849 O $20,57,000 2,93,857 $2,93,857$2,93,857 $2,93,857 $2,93,857 $2,93,857 $2,93,857 2,93,857 $2,93,857$2,93,857 $2,93,857 $2,93,857 $2,93,857 $2,93,857 Net income after tax but before depreciation$3,26,060$3,46,340 $3,67,228$3,88,743 $4,10,904 $4,33,729 $4,57,239 $3,78,605 $31,08,849 Discounting factor @ 8% Present value of inflow Add Present value of terminal value present value total Inflows Initial Equipment cost Net present value 0.794 0.926 0.857 0.735 0.681 0.63 0.583 0.54 3,01,932 $2,96,813 $2,91,579 $2,85,726$2,79,826$2,73,249 $2,66,571 $2,04,447 $22,00,143 $51,300 $22,51,443 $20,57,000 $1,94,443 Project 2 1 to 7 years 8th year Total Particulars Operating Revenue PA Operating Cost PA Depreciation PA Net income before tax Income tax @ 35% Net income after tax Add: Depreciation $10,00,300 $10,00,300 $20,00,600 6,88,800$6,88,800 $13,77,600 $1,56,214 $1,55,286$3,11,500 $4,66,786 54,350 $1,09,025 $1,63,375 1,00,936$2,02,475 $3,03,411 SO$1,56,214 $1,56,214 $1,56,214 Net income after tax but before depreciation $2,57,150S2,02475 $4,59,625 Anuity factor @ 8% for 7 years Present value of inflow Add: Present value of terminal value present value total Inflows Initial Equipment cost Net present value 5.206 0.54 $13,38,723 $1,09,337 $14,48,059 48,600 $48,600 $1,57,937 $14,96,659 $10,93,500 $4,03,159

The net present value in project 2 is more than project 1 so it is better to invest in project 2.