Crofton Inc

question 153

Essay

Crofton Inc.is evaluating new machinery in its foundry.The machinery would replace existing equipment.The new machinery would cost $230,000, would last 5 years, and would have a salvage value of $28,000.The existing machinery currently has a net book value of $52,000 and could be sold for $38,000.If kept, the old machine would have a salvage value of $6,000 in 5 years' time.The new machinery is expected to lower direct labour costs by $18,000 per year.The current variable overhead rate is 120% of direct labour.Other annual cost savings are projected to be $30,000.Due to the reduction in the production cycle time, working capital requirements will decrease by $25,000 during the life of the new machine.Ignore income taxes.Required:
a.Compute the net present value of replacing the existing equipment at a 9 percent required rate of return.
b.Compute the internal rate of return.

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Definitions:

Direct Materials

Raw materials that are consumed in the production process and can be directly traced to the end product.

Total Variable Overhead Variance

The difference between the expected and actual costs of variable overheads in a manufacturing or production process.

Variable Overhead

Costs that vary with the level of production output, such as materials, utilities, and commissions, contrary to fixed overheads.

Total Direct Materials Cost Variance

The difference between the budgeted cost of direct materials and the actual cost incurred for the materials.