The Managerial Accounting Department at your company has been engaged by the Production Department for
assistance in evaluating a purchase decision. The equipment the production department is currently utilizing is outdated
and has become costly to maintain. New machines would also provide increased efficiencies leading to increased sales.
Due to this, the department is considering replacing all equipment with new machines.
Data:
- Cost of Current Machines: $800,000
- Cost of New Machines: $1,250,000
- Annual Maintenance on Current Machines: $125,000
- Annual Maintenance on New Machines: $54,000
- Salvage Value of Current Machines: $325,000
- Immediate employee training cost on new machines: $15,000
- Working Capital needed for new machines: $50,000
- Would be needed once machines are purchased and working capital released after 5 years
- Increased sales opportunity provided by new machines: $200,000 first year and growing at 5% per year
after
- Company’s Required Rate of Return: 10%
- Contribution margin: 47%
- Depreciation and income taxes should be ignored.

1. Explain to me the decision you are assisting the department with and at a high level and
how you will assist.
2. Define in your own words: Relevant Costs/Revenues (look to previous chapters to assist), Net Present
Value, Internal Rate of Return, and Contribution Margin.
3. Identify and list the relevant costs and revenues to be included in the decision. For this week you only
need to list the name or description of the expense.

Answer rating: 100% (QA)

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