Bramhope Manufacturing Co. Ltd has found that, after only two years of using a machine for a
Question:
Bramhope Manufacturing Co. Ltd has found that, after only two years of using a machine for a semi-automatic process, a more advanced model has arrived on the market. This advanced model will not only produce the current volume of the companys product more efficiently, but allow increased output of the product. The existing machine had cost 32,000 and was being depreciated straight-line over a ten-year period, at the end of which it would be scrapped. The market value of this machine is currently 15,000 and there is a prospective purchaser interested in acquiring it. The advanced model now available costs 123,500 fully installed. Because of its more complex mechanism, the advanced model is expected to have a useful life of only eight years. A scrap value of 20,500 is considered reasonable. A comparison of the existing and advanced model now available shows the following:
existing machine advanced model
capacity per year 200,000 units 230,000 units
selling price per unit
production costs per unit 0.95 0.95
Labour
Materials 0.12 0.08
Fixed overhead 0.48 0.46
(allocation of portion of
company's fixed overheads) 0.25 0.16
The sales director is of the opinion that additional output could be sold at 95p per unit. If the advanced model were to be run at the old production level of 200,000 units per annum, the operators would be freed for a proportionate period of time for reassignment to the other operations of the company. The sales director has suggested that the advanced model should be purchased by the company to replace the existing machine. The required return is 15 per cent.
(i) You are required to calculate:
(a) payback period
(b) the net present value
(c) the internal rate of return (to the nearest per cent).
(ii) What recommendation would you make to the sales director? What other considerations are relevant?
International Marketing And Export Management
ISBN: 9781292016924
8th Edition
Authors: Gerald Albaum , Alexander Josiassen , Edwin Duerr