Pietro Yon has been supplied with information from a component manufacturer who has asked for advice on the best project to accept for the purchase / replacement of a piece of machinery.

The company are considering selling their old machine that has a capital cost of 260 000 and replacing it with an up to date model costing 220 000.For immediate purchase the company will receive 120 000-part exchange allowance.

Both the current and new machines are able to meet the expected company demand, estimated at:

Year Units

1 90 000

2 50 000

3 30 000

After three years, it is predicted that demand will be zero due to the technological developments in the industry.

The following data has been provided for the existing and new machine:

Current Machine New Machine

per unit per unit

Direct Materials 1.80 1.80

Direct Labour 0.75 0.60

Variable Overheads 0.45 0.30

Depreciation 0.35 0.55

Additional information

(1)The selling price for each component is 5.00 and this will remain constant for the next three years.

(2)The company expect the cost of direct materials and direct labour to increase by 5% each year.

(3)The company predicts that repair and maintenance costs for the current machine will be 7000 per annum.

(4)The current machine is expected to have a zero-residual value at the end of year 3.

(5)The company predicts that repair and maintenance costs for the new machine will be 1000 per annum.

(6)The new machine is expected to have a 75 000 residual value at the end of year 3.

The company's cost of capital is 15%

Extract from the present value table for 1 at 15%

Yea Units

1 0.870

2 0.756

3 0.658

4 0.572

Pietro would like you to produce a business report that can be given to the company offering advice on the best course of action for the purchase / replacement machine.

REQUIRED

A report that evaluates the capital expenditure proposals using appropriate financial techniques.

Extension activities:

To gain a distinction grade you must include an assessment of the impact of the business proposal on the strategic direction of the organisation.

Capital Expenditure Appraisal - Microsoft Word X Home Insert Page Layout References Mailings Review View K Cut Arial 11 - A A 423 AA Find En Copy AaBbCc AaBbCc[ AaBbCc[ AaBbC AaBbCc AaB AaBbCC. AQBbCCD Gac Replace Paste Format Painter B / U - abe X2 X' Aa- ab - A Main Body 1 Normal T No Spaci... Heading 1 Heading 2 Title Subtitle Subtle Em... Change Styles . Select Clipboard Font Paragraph Styles Editing Pietro Yon has been supplied with information from a component manufacturer who has asked for advice on the best project to accept for the purchase/replacement of a piece of machinery. Extract from the present value table for $1 at 15% The company are considering selling their old machine that has a capital cost of $260 Year Units 000 and replacing it with an up to date model costing $220 000. For immediate 0.870 purchase the company will receive $120 000-part exchange allowance 0.756 0.658 Both the current and new machines are able to meet the expected company demand, 0.572 estimated at Year Units Pietro would like you to produce a business report that can be given to the company ON - 90 000 offering advice on the best course of action for the purchase / replacement machine. 50 000 30 000 REQUIRED After three years, it is predicted that demand will be zero due to the technological Prepare a report that evaluates the capital expenditure proposals using appropriate developments in the industry. financial techniques. The following data has been provided for the existing and new machine: Extension activities: Current Machine New Machine E per unit E per unit To gain a distinction grade you must include an assessment of the impact of the Direct Materials 1.80 1.80 business proposal on the strategic direction of the organisation. Direct Labour 0.75 0.60 Variable Overheads 0.45 0.30 Depreciation 0.35 0.55 (Using the data provided in the case study, the learner is required to evaluate the business proposals for capital expenditure identifying benefits and issues and reaching Additional information conclusions. The learner must use appropriate financial techniques including payback, accounting rate of return, net present value and internal rate of return. (1) The selling price for each component is $5.00 and this will remain constant for Based on the data in the case study the learner is required to evaluate the business the next three years. (2) The company expect the cost of direct materials and direct labour to increase by proposals for capital expenditure using appropriate financial techniques. The learner 5% each year. could consider non-financial factors, cost benefit analysis and value for money!) (3) The company predicts that repair and maintenance costs for the current machine will be $7000 per annum. (4) The current machine is expected to have a zero-residual value at the end of year 3. (5) The company predicts that repair and maintenance costs for the new machine will be $1000 per annum. (6) The new machine is expected to have a $75 000 residual value at the end of year 3 O Page: 2 of 2 Words: 450 80 2 70% +