San Joaquin Manufacturing Company Specializes in the Production of Precision

question 95

Essay

San Joaquin Manufacturing Company specializes in the production of precision tools. Management is in the process of selecting a new drill press. The press under consideration will cost $180,000 plus necessary installation charges of $25,000. Past experience indicates that the press will last for ten years and should have a residual value at the end of that period of about $15,000. Expected annual cash revenues from the press should average $66,000, and related cash operating costs should be around $30,000. Management has decided on a minimum desired before-tax rate of return of 12 percent.
Present value multipliers:
$\begin{array}{lrrr} & \text { 6 Percent } & \mathbf{1 2} \text { Percent } & \mathbf{1 4} \text { Percent } \\\text { Present value of } \$ 1 \text { at end of ten years } & .558 & .322 & .270 \\\text { Present value of } \$ 1 \text { received in each of the next } & 7.360 & 5.650 & 5.216 \\\text { ten years }\end{array}$
a. Using before-tax information and the net present value method to evaluate this capital investment, determine whether the company should purchase the drill press. Support your answer.
b. If management had decided on a minimum desired before-tax rate of return of 14 percent, should the drill press be purchased? Show all computations to support your answer.

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Definitions:

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An uncomfortable mental state due to a contradiction between two attitudes or between an attitude and a behavior.

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A widely held but oversimplified and generalized belief about a particular category of people, often leading to prejudiced attitudes and discriminatory behavior.

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