Mount Manufacturing Company produces industrial and public-safety shirts. As is done in most apparel manufacturing, the cloth must be cut into shirt parts in accordance with patterns marked on sheets of paper, which indicate the way that the particular cloth is to be cut. At present, these patterns are marked manually, and the annual labor cost of the process is running around $103,718. Mount has the option of purchasing one of two automated marking systems. The two systems are the Lectra System 305 and the Tex Corporation Marking System. The comparative characteristics of the two systems are as follows: The firm's marginal tax rate is 40%, and the interest rate used for project evalu- ation is 12% after taxes. (a) Based on the most likely estimates, which alternative is better? (b) Suppose that the company estimates the material savings during the first year for each system on the basis of the following probability distributions: Lectra System Material Savings Probability Most Likely Estimates $150,000 0.25 Lectra System Tex Syatem $230,000 0.40 Annual labor cost $51,609 $51,609 $270,000 0.35 Annual material savings $230,000 $274,000 Теx System Material Suvings Investment cost $136,150 $195,500 Estimated life 6 уears б уеars Probubliity $200,000 0.30 Salvage value Depreciation method (MACRS) $20,000 $15,000 5 year 5 year $274,000 0.50 $312,000 0.20 Further assume that the annual material savings for both Lectra and Tex are statistically independent. Compute the mean and variance for the equivalent annual value of operating each system.
Mount Manufacturing Company produces industrial and public-safety shirts. As is done in most apparel manufacturing, the cloth must be cut into shirt parts in accordance with patterns marked on sheets of paper, which indicate the way that the particular cloth is to be cut. At present, these patterns are marked manually, and the annual labor cost of the process is running around $103,718. Mount has the option of purchasing one of two automated marking systems. The two systems are the Lectra System 305 and the Tex Corporation Marking System. The comparative characteristics of the two systems are as follows: The firm's marginal tax rate is 40%, and the interest rate used for project evalu- ation is 12% after taxes. (a) Based on the most likely estimates, which alternative is better? (b) Suppose that the company estimates the material savings during the first year for each system on the basis of the following probability distributions: Lectra System Material Savings Probability Most Likely Estimates $150,000 0.25 Lectra System Tex Syatem $230,000 0.40 Annual labor cost $51,609 $51,609 $270,000 0.35 Annual material savings $230,000 $274,000 Теx System Material Suvings Investment cost $136,150 $195,500 Estimated life 6 уears б уеars Probubliity $200,000 0.30 Salvage value Depreciation method (MACRS) $20,000 $15,000 5 year 5 year $274,000 0.50 $312,000 0.20 Further assume that the annual material savings for both Lectra and Tex are statistically independent. Compute the mean and variance for the equivalent annual value of operating each system.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Mount Manufacturing Company produces industrial and public-safety shirts.
As is done in most apparel manufacturing, the cloth must be cut into shirt parts
in accordance with patterns marked on sheets of paper, which indicate the way
that the particular cloth is to be cut. At present, these patterns are marked
manually, and the annual labor cost of the process is running around $103,718.
Mount has the option of purchasing one of two automated marking systems.
The two systems are the Lectra System 305 and the Tex Corporation Marking
System. The comparative characteristics of the two systems are as follows:
The firm's marginal tax rate is 40%, and the interest rate used for project evalu-
ation is 12% after taxes.
(a) Based on the most likely estimates, which alternative is better?
(b) Suppose that the company estimates the material savings during the first
year for each system on the basis of the following probability distributions:
Lectra System
Material Savings
Probability
Most Likely Estimates
$150,000
0.25
Lectra System Tex Syatem
$230,000
0.40
Annual labor cost
$51,609
$51,609
$270,000
0.35
Annual material savings
$230,000
$274,000
Теx System
Material Suvings
Investment cost
$136,150
$195,500
Estimated life
6 уears
б уеars
Probubliity
$200,000
0.30
Salvage value
Depreciation method (MACRS)
$20,000
$15,000
5 year
5 year
$274,000
0.50
$312,000
0.20
Further assume that the annual material savings for both Lectra and Tex are
statistically independent. Compute the mean and variance for the equivalent
annual value of operating each system.
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