ABC Boat Company Is Interested in Replacing a Moulding Machine

question 49

Essay

ABC Boat Company is interested in replacing a moulding machine with a new improved model. The old machine has a salvage value of $20,000 now and a predicted salvage value of $4,000 in six years, if rebuilt. If the old machine is kept, it must be rebuilt in one year at a predicted cost of $40,000. The new machine costs $160,000 and has a predicted salvage value of $28,000 at the end of six years. The new machine will generate cash savings of $40,000 for each of the first three years and $20,000 for each year of its remaining six-year life. Ignore income taxes.
Required:
What is the net present value of purchasing the new machine if the company has a required rate of return of 14 percent?

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Definitions:

Plantwide Predetermined Overhead

An overhead rate calculated for an entire manufacturing plant, applied to all products regardless of the specific department in which they were produced.

Machine-Hours

A measure of production activity that quantifies the number of hours machines are operated in the manufacturing process.

Mark Up

The percentage added to the cost price of goods to cover overhead and profit.

Direct Labor-Hours

This refers to the total number of hours worked by employees who are directly involved in the production of goods or services.