During March 19X1 the West Tacoma Works of Ryan Industries was considering the purchase of a 100-ton crane to be used to move sub assemblies around the shop floor and to transport finished products to temporary storage in the Dry End or to the Flatbed Bays. Similar crane projects had been rejected for economic reasons on three previous occasions, the most recent, eight years ago. West Tacoma fabricates heating and air conditioning components for large commercial buildings. The parts and sub-assemblies are moved among the various shops by lift trucks or, in the case of large or heavy items, on a fleet of ingenious four-axle, steerable dollies that are pushed about by lift trucks. In the case of these heavy items, a jib crane is used to lift the finished product onto flatbed trucks.

The new crane will cost about $350,000; modifications to the plant including wiring for the crane power supply are estimated to be $130,000. Allowing for shipping, installation, and testing, the total cost of the crane is expected to be close to one-half million dollars, all of which will be capitalized and depreciated for tax purposes over eight years. Although the crane will be fully depreciated for tax purposes, the crane is estimated to have a salvage value of $20,000 at the end of eight years. Offsetting this cost somewhat will be the proceeds from the sale of the trucks and scrapping of the dollies. The six lift trucks together originally cost $70,000. $22,000 of depreciation has already been charged against this; total depreciation of these trucks has been averaging $8,000 yearly. Ryan has received a bid of $25,000 for the six trucks but estimates the dollies might cost more to dismantle than the value of the resulting scrap. The trucks have an estimated scrap value of $10,000 at the end of eight years. The dollies have never been depreciated since they were built at West Tacoma from scrap and thus had no cost. The jib crane will be unaffected.

The crane will require two skilled operators. It is estimated that each operator will be paid $16,640, which includes fringe benefits. Contract maintenance of $9,000 per year and additional power and miscellaneous costs of $4,000 are expected to be incurred yearly. The lift trucks operators receive a total of $99,840 per year. The lift trucks require annual maintenance, which consists of labor of $5,200 per truck and supplies for all trucks combined of $5,000 per year. Lift trucks each burn $3,600 per year of propane, and might last indefinitely with proper maintenance. In addition to savings in labor and fuel, the crane is expected to save at least $10,000 yearly in improved labor efficiency.

    Over 30% of the West Tacoma Works' floor space is taken up with extra-wide aisles to accommodate the dollies. With the overhead crane, almost half of the space will be free for other purposes, although at present space is currently available in other areas, anyway. Ryan's capital budgeting procedures require a return of 10% after tax on such investments if not more than eight years. The Company's effective tax rate in 40% which you should ignore.

Requirements:

1. Compute the NPV of buying the crane over and above keeping the trucks and dollies and STATE what your decision is based on the numbers. Ignore taxes and therefore depreciation or a depreciation tax shield which we did not cover.

2. Prepare a list of 6 qualitative items that you would like to have addressed before the company makes its decision. Is there a use for the space savings? Can we quantify the cash flow that the space would bring in from that use?

Answer rating: 100% (QA)

1Computation of NPV Cash outflows Year Cash flow in PVIF 10 Discounted cash flow 10 Cost of crane 0 ... View the full answer