Ben Alexander, an enterprising young engineering graduate who worked part-time as a machinist during collage, decided to

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Ben Alexander, an enterprising young engineering graduate who worked part-time as a machinist during collage, decided to establish his own mechanical design and specialty manufacturing business after graduating. His workload is increasing due to a few good contracts, and he is spending longer hours on hands-on machining tasks producing fabricated metal products.

Ben is considering the purchase of a bed-type milling machine with automatic table feed and other features.

The cost of the machine is $21,000 with an expected life of 12 years. He would keep it for only 5 years, however, and be able to sell it for $5,000 at that time. Ben has a time limitation of only 500 hours per year that he can devote to milling operations, even though he can sell everything he produces.

If he buys the mill, he will be able to complete parts in 4 minutes each.

If he does not purchase the mill, he will continue producing with current equipment at a rate of 12 minutes each. Each part he turns out provides a net income before tax of $2.

A third alternative, in addition to buying or not, includes leasing the milling machine for $4,000 paid annually at the beginning of the year. Marginal taxes are 40 percent, and the after-tax MARR is 9 percent. Create a spreadsheet to determine the best alternative.

MARR
Minimum Acceptable Rate of Return (MARR), or hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other...
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Accounting

ISBN: 978-0132690089

9th Canadian Edition volume 2

Authors: Charles T. Horngren, Walter T. Harrison Jr., Jo Ann L. Johnston, Carol A. Meissner, Peter R. Norwood

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