Sensitivity Analysis; Spreadsheets Use the information in Problem 12-53 to answer the following questions:
Required
1. What would the maximum machine operating cost of the overhauled AccuDril need to be in order for the replacement decision to be an incorrect financial decision? (Use the PV factors and/or PV annuity factors from Appendix C to answer this question.)
2. Use the Goal Seek function in Excel to determine what the maximum amount of annual after-tax operating costs for the new machine must be in order to change the decision. (Hint: Set up a spreadsheet to calculate the PV of after-tax cash flows for each alternative. Use the built-in functions in Excel, NPV and/or PV, to determine the present values of these cash flows.)
3. New technologies make it possible to overhaul this machine now for $80,000. Both the overhaul cost and the undepreciated cost (book value) of the existing asset are to be depreciated over two years. The overhaul will improve its productivity by 20% and reduce the cost of a major overhaul two years from now to $30,000. All overhaul costs will be depreciated using the straight-line method. With either overhaul, the machine will have no salvage value. Either overhaul can be scheduled during regular maintenance and will not affect production. Despite the old saying, “If it ain’t broke, don’t fix it,” should you overhaul it now or wait for two years to do the overhaul as planned originally, assuming that no funds are currently available to purchase RoboDril 1010K? (Use the built-in functions, PV and/or NPV, for your present value calculations.)
4. Performing the overhaul now also improves product quality. Management believes that the quality improvement is rather subtle and very difficult to quantify. Should the firm overhaul now?
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