The Weather Company manufactures and sells 50,000 umbrellas per year at an average price of $20. It
Question:
The Weather Company manufactures and sells 50,000 umbrellas per year at an average price of $20.
It currently uses a machine that makes each umbrella at a variabe cost of $10. The machine has a book value of $150,000 and has 5 years left in its economic and accounting life. Its annual depreciation is $30,000. It could be sold now for $120,000, but won't have any value in 5 years.
The company could replace the old machine with a new machine that costs $700,000. The new machine produces the same number of umbrellas at a variable cost of $5, has a life span of 5 years and is to be depreciated on a straight-line basis to a salvage value of $70,000. Since the machine can make higher-quality umbrellas, the average sale price would increase to $22
The project's discount rate is 7% and the company's marginal tax rate is 21%.
Part 1 What is the annual cash flow in years 1 to 5 with the new machine?
Part 2 What is the cash flow from salvage value from selling the old machine now?
Part 3 What is the NPV of buying the new machine (assuming you sell the old one now)?
Managerial Accounting An Introduction to Concepts Methods and Uses
ISBN: 978-0324639766
10th Edition
Authors: Michael W. Maher, Clyde P. Stickney, Roman L. Weil