Treads Corporation Is Considering the Purchase of a New Machine

question 141

Multiple Choice

Treads Corporation is considering the purchase of a new machine to replace an old machine that is currently being used. The old machine is fully depreciated but can be used by the corporation for five more years. If Treads decides to buy the new machine, the old machine can be sold for $60,000. The old machine would have no salvage value in five years. The new machine would be purchased for $1,000,000 in cash. The new machine has an expected useful life of five years with no salvage value. Due to the increased efficiency of the new machine, the company would benefit from annual cash savings of $300,000.
Treads Corporation uses a discount rate of 12%. (Ignore income taxes.)
Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided.
The internal rate of return of the project is closest to:

• A) 14%
• B) 16%
• C) 18%
• D) 20%

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Definitions:

Fixed Overhead Volume Variance

The difference between the budgeted and actual volume of production, multiplied by the fixed overhead rate, indicating how fixed costs are allocated over different levels of output.

Fixed Overhead Budget Variance

This term refers to the difference between the budgeted fixed overhead costs and the actual fixed overhead costs incurred.

Standard Fixed Manufacturing Overhead Rate

The predetermined rate used to apply fixed manufacturing overhead to products, based on an estimate of total fixed manufacturing costs and an allocation basis.

Actual Fixed Overhead Costs

The real costs incurred for fixed overhead during a specified accounting period.