Imagine that you are the owner of a chain fitness club, ZKA Ltd. The treadmills that were
Question:
Imagine that you are the owner of a chain fitness club, ZKA Ltd. The treadmills that were purchased for the gyms are getting quite old, and many customers are complaining about them being noisy. The finance department has gone through the outgoing payments and reported that they cost £118,000; buying new ones for all the branches in the country will cost £141,000. Based on experience, we know that the new treadmills will last for five years, and we will be able to sell them at a second-hand market for £27,000. The depreciation rate for the existing treadmills is £23,000 a year, and the finance manager will write them off in three years. It's important to note that if you don't replace them with new ones now, you will have to replace them in two years. There is a buyer for the old treadmills now who is offering £38,000. If you don't sell them right now and instead keep them for another two years, you would be able to sell them for £10,000. Considering the maintenance cost of the existing treadmills, you will be able to save £26,000 per year (cost of operation) by buying new.
New treadmill operating cash flow for 5 years | Old treadmills operating cash flow | The initial cost of old machine using after tax salvage value | Tax rate | Discount rate 2 % |
27000 | 8900 | 68500 | 7% | 2% |
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Use your knowledge to explain the best decision. Is it better to substitute the old treadmills with the new ones?
What would the cash flow be, assuming we are not concerned with what's going to happen in two years and we are just wondering if we should replace the treadmills or not.
Transportation A Global Supply Chain Perspective
ISBN: 9781337406642
9th Edition
Authors: Robert A. Novack, Brian Gibson, Yoshinori Suzuki, John J. Coyle