NPV, Make or Buy, MACRS, Basic Analysis

Jonfran Company manufactures three different models of paper shredders including the waste container, which serves as the base. While the shredder heads are different for all three models, the waste container is the same. The number of waste containers that Jonfran will need during the following years is estimated as follows:

20x550,00020x650,00020x752,00020x855,00020x955,000

The equipment used to manufacture the waste container must be replaced because it is broken and cannot be repaired. The new equipment would have a purchase price of $945,000 with terms of 2/10, n/30; the company's policy is to take all purchase discounts. The freight on the equipment would be $11,000, and installation costs would total $22,900. The equipment would be purchased in December 20x4 and placed into service on January 1, 20x5. It would have a five-year economic life and would be treated as three-year property under MACRS. This equipment is expected to have a salvage value of $12,000 at the end of its economic life in 20x9. The new equipment would be more efficient than the old equipment, resulting in a 25 percent reduction in both direct materials and variable overhead. The savings in direct materials would result in an additional one-time decrease in working capital requirements of $2,500, resulting from a reduction in direct material inventories. This working capital reduction would be recognized at the time of equipment acquisition.

The old equipment is fully depreciated and is not included in the fixed overhead. The old equipment from the plant can be sold for a salvage amount of $1,500. Rather than replace the equipment, one of Jonfran's production managers has suggested that the waste containers be purchased. One supplier has quoted a price of $27 per container. This price is $8 less than Jonfran's current manufacturing cost, which is as follows:

Direct materials $10Direct labor 8Variable overhead 6Fixed overhead: Supervision $2 Facilities 5 General 4 11Total unit cost $35

Jonfran uses a plantwide fixed overhead rate in its operations. If the waste containers are purchased outside, the salary and benefits of one supervisor, included in fixed overhead at $45,000, would be eliminated. There would be no other changes in the other cash and noncash items included in fixed overhead except depreciation on the new equipment.

Jonfran is subject to a 25 percent tax rate. Management assumes that all cash flows occur at the end of the year and uses a 12 percent after-tax discount rate.

You must use the Exhibit 19B.1 and Exhibit 19B.2 present value tables and Exhibit 19.5 to solve the following problems.

Required:

Question Content Area

1. Prepare a schedule of cash flows for the make alternative. Enter cash outflows as negative amounts and cash inflows as positive amounts. Round your answers to the nearest dollar when rounding is required.

ItemCFYear 20x4 Equipment$fill in the blank f3b6dbf8606afe1_1Discountfill in the blank f3b6dbf8606afe1_2Freightfill in the blank f3b6dbf8606afe1_3Installationfill in the blank f3b6dbf8606afe1_4Salvage-oldfill in the blank f3b6dbf8606afe1_5Working capital reductionfill in the blank f3b6dbf8606afe1_6Total$fill in the blank f3b6dbf8606afe1_7Year 20x5 Operating expenses$fill in the blank f3b6dbf8606afe1_8Depreciation tax shieldfill in the blank f3b6dbf8606afe1_9Total$fill in the blank f3b6dbf8606afe1_10Year 20x6 Operating expenses$fill in the blank f3b6dbf8606afe1_11Depreciation tax shieldfill in the blank f3b6dbf8606afe1_12Total$fill in the blank f3b6dbf8606afe1_13Year 20x7 Operating expenses$fill in the blank f3b6dbf8606afe1_14Depreciation tax shieldfill in the blank f3b6dbf8606afe1_15Total$fill in the blank f3b6dbf8606afe1_16Year 20x8 Operating expenses$fill in the blank f3b6dbf8606afe1_17Depreciation tax shieldfill in the blank f3b6dbf8606afe1_18Total$fill in the blank f3b6dbf8606afe1_19Year 20x9 Operating expenses$fill in the blank f3b6dbf8606afe1_20Salvage-newfill in the blank f3b6dbf8606afe1_21Total$fill in the blank f3b6dbf8606afe1_22

Question Content Area

Calculate the NPV of the make alternative. Round intermediate calculations and your final answer to the nearest dollar. If the NPV is negative, enter your answer as a negative value.

$fill in the blank a3073f05d04d011_1

Question Content Area

2. Prepare a schedule of cash flows for the buy alternative. Enter cash outflows as negative amounts and cash inflows as positive amounts.

ItemCFYear 20x4 Salvage-old$fill in the blank d54e4608e047f85_1Year 20x5 Purchase costfill in the blank d54e4608e047f85_2Year 20x6 Purchase cost:fill in the blank d54e4608e047f85_3Year 20x7 Purchase cost:fill in the blank d54e4608e047f85_4Year 20x8 Purchase cost:fill in the blank d54e4608e047f85_5Year 20x9 Purchase cost:fill in the blank d54e4608e047f85_6

Question Content Area

Calculate the NPV of the buy alternative. Round intermediate calculations and your final answer to the nearest dollar. If the NPV is negative, enter your answer as a negative value. $fill in the blank 9d7d4ef7703e02a_1

3. Which should Jonfran domake or buy the containers?

BuyMake

Tables: