The Tech Mech Company produces and sells 6 000 modular computer
The Tech Mech Company produces and sells 6,000 modular computer desks per year at a selling price of $500 each. Its current production equipment, purchased for $1,500,000 and with a five-year useful life, is only two years old. It has a terminal disposal value of $0 and is depreciated on a straight line basis. The equipment has a current disposal price of $600,000. However, the emergence of anew molding technology has led Tech Mech to consider either upgrading or replacing the production equipment. The following table presents data for the two alternatives:
All equipment costs will continue to be depreciated on a straight-line basis. For simplicity, ignore income taxes and the time value of money.
1. Should Tech Mech upgrade its production line or replace it? Show your calculations.
2. Now suppose the one-time equipment cost to replace the production equipment is some-what negotiable. All other data are as given previously. What is the maximum one-time equipment cost that Tech Mech would be willing to pay to replace the old equipment rather than upgrade it?
3. Assume that the capital expenditures to replace and upgrade the production equipment areas given in the original exercise, but that the production and sales quantity is not known. For what production and sales quantity would Tech Mech
(a) Upgrade the equipment or
(b) Replace the equipment?
4. Assume that all data are as given in the original exercise. Dan Doria is TechMech’s manager, and his bonus is based on operating income. Because he is likely to relocate after about a year, his current bonus is his primary concern. Which alternative would Doria choose? Explain.
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