Migami Company is considering the purchase of a new machine. Its invoice price is $117,000, freight charges

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Migami Company is considering the purchase of a new machine. Its invoice price is $117,000, freight charges are estimated to be $3,000, and installation costs are expected to be $5,000. Salvage value of the new machine is expected to be zero after a useful life of 4 years. Existing equipment could be retained and used for an additional 4 years if the new machine is not purchased. At that time, the Salvage value of the equipment would be zero. If the new machine is purchased now, the existing machine would be scrapped. Migami accountant, Caitlyn Lahr, has accumulated the following data regarding annual sales and expenses with and without the new machine.
1. Without the new machine, Migami can sell 10,000 units of product annually at a per unit selling price of $100. If the new unit is purchased, the number of units produced and sold would increase by 20%, and the selling price would remain the same.
2. The new machine is faster than the old machine, and it is more efficient in its usage of materials. With the old machine the gross profit rate will be 28.5% of sales, whereas the rate will be 30% of sales with the new machine.
3. Annual selling expenses are $160,000 with the current equipment. Because the new equipment would produce a greater number of units to be sold, annual selling expenses are expected to increase by 10% if it is purchased.
4. Annual administrative expenses are expected to be $100,000 with the old machine, and $112,000 with the new machine.
5. The current book value of the existing machine is $30,000. Migami uses straight-line depreciation.
6. Migami management has a required rate of return of 15% on its investment and a cash payback period of no more than 3 years.

Instructions
With the class divided into groups, answer the following.
(a) Calculate the annual rate of return for the new machine.
(b) Compute the cash payback period for the new machine.
(c) Compute the net present value of the new machine.
(d) On the basis of the foregoing data, would you recommend that Migami buy the machine? Why?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...
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Managerial Accounting Tools for business decision making

ISBN: 978-0470477144

5th edition

Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso

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