# Question

Ludmilla Quagg owns a fitness centre and is thinking of replacing the old Fit-O-Matic machine with a brand new Flab-Buster 3000. The old Fit-O-Matic has a historical cost of $50,000 andaccumulated amortization of $46,000, but has a trade-in value of $5,000. It currently costs $1,200 per month in utilities and another $10,000 a year in maintenance to run the Fit-O-Matic. Ludmilla feels that the Fit-O-Matic can be used for another ten years, after which it would have no salvage value. The Flab-Buster 3000 would reduce the utilities costs by 30% and cut the maintenance cost in half. The Flab-Buster 3000 costs $98,000, has a ten-year life, and an expected disposal value of $10,000 at the end of its useful life. Ludmilla charges customers $10 per hour to use the fitness centre. Replacing the fitness machine will not affect the price of service or the number of customers she can serve. Ludmilla also looked at replacing the Fit-O-Matic with a Walk-N-Pull Series 3, which costs $78,000. However, she prefers the Flab-Buster 3000.

REQUIRED

1. Ludmilla wants to evaluate the Flab-Buster 3000 project using capital budgeting techniques, but does not know how to begin. To help her, read through the problem and separate the cash flows into four groups:

(1) net initial investment cash flows,

(2) cash flow savings from operations,

(3) cash flows from terminal disposal of investment, and

(4) cash flows not rele- vant to the capital budgeting problem.

2. Assuming a required rate of return of 8%, and straight-line amortization over remaining useful life of machines, should Ludmilla buy the Flab-Buster 3000?

REQUIRED

1. Ludmilla wants to evaluate the Flab-Buster 3000 project using capital budgeting techniques, but does not know how to begin. To help her, read through the problem and separate the cash flows into four groups:

(1) net initial investment cash flows,

(2) cash flow savings from operations,

(3) cash flows from terminal disposal of investment, and

(4) cash flows not rele- vant to the capital budgeting problem.

2. Assuming a required rate of return of 8%, and straight-line amortization over remaining useful life of machines, should Ludmilla buy the Flab-Buster 3000?

## Answer to relevant Questions

The management of Kleinburg Industrial Bakery is analyzing two competing investment projects and they must decide which one can be done immediately and which one can be postponed for at least a year. The details of each ..."Discounted cash flow techniques are relevant only to profit-seeking organizations." Do you agree? Explain. Assume the same facts as in Exercise 22-18, except that a different hospital, City Hospital, is a taxpaying entity. The income tax rate is 30% for all transactions that affect income taxes. REQUIRED 1. Do requirement 1 of ...The Apex Company is evaluating a capital budgeting proposal for the current year. Deal with operating cash flow, not operating income. The relevant data are as follows: Present Value of an Annuity Year of $1 in ...Conglomerates has not yet told Sam Pilon what the total amount of funds available for capital projects at Firthing Manufacturing will be, except for the after-tax required rate of return being 12%. Pilon, division president ...Post your question

0