Wiser Company needs more space and machinery to increase production. The production manager have been trying...

 

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Wiser Company needs more space and machinery to increase production. The production manager have been trying to decide which of two plans to accept. Investment Additional fixed cash operating cost per year Additional capacity it machine hours per year Plan A 4,000,000 600,000 200,000 The company uses straight line method of depreciation. No salvage value is expected for either investment at the end of their ten-year useful lives. The production manager prefers plan B because the cost per machine hour and investment per machine hour are lower than those for Plan A. The president, A. F. Alvarez, is unsure about this and asks the sales manager whether the capacity would be fully utilized. The sales manager provides the follow data. 30,000 18 2 Plan B 5,500,000 800,000 280,000 Product Y 40,000 24 4 Potential increased sales, in units Contribution margin per unit Machine hours required per unit Wiser Company pays taxes at a 40% rate and has cost of capital of 12%. Z 30,000 40 5 Required: a) Prepare a good financial analysis of Plan A and Plan B b) Using the present value factor, determine the Net Present Value of Plan A and Plan B c) Which Plan will you recommend? Give a well organized justification. d) Supporing the recommendation for expansion about expanding the capacity, illustrate how this expanded capacity should be used? Wiser Company needs more space and machinery to increase production. The production manager have been trying to decide which of two plans to accept. Investment Additional fixed cash operating cost per year Additional capacity it machine hours per year Plan A 4,000,000 600,000 200,000 The company uses straight line method of depreciation. No salvage value is expected for either investment at the end of their ten-year useful lives. The production manager prefers plan B because the cost per machine hour and investment per machine hour are lower than those for Plan A. The president, A. F. Alvarez, is unsure about this and asks the sales manager whether the capacity would be fully utilized. The sales manager provides the follow data. 30,000 18 2 Plan B 5,500,000 800,000 280,000 Product Y 40,000 24 4 Potential increased sales, in units Contribution margin per unit Machine hours required per unit Wiser Company pays taxes at a 40% rate and has cost of capital of 12%. Z 30,000 40 5 Required: a) Prepare a good financial analysis of Plan A and Plan B b) Using the present value factor, determine the Net Present Value of Plan A and Plan B c) Which Plan will you recommend? Give a well organized justification. d) Supporing the recommendation for expansion about expanding the capacity, illustrate how this expanded capacity should be used?

Answer rating: 100% (QA)

aFinancial analysis of Plan A and Plan B Plan A 1Potential increased sales in units 2Contribution ma... View the full answer