Problem 1: Four different machines were under consideration for materials flow improvement on a drug bottling line. An engineer performed the economic analysis to select the best machine, but some of his calculations were removed from the report by a disgruntled employee. All machines are assumed to have a 10-year life. Select the best machine at MARR = 18% per year, provided one must be chosen. Machine 1 2 3 4 Initial cost, $ ? -60,000 -72,000 -98,000 Annual cost, $ per year Annual savings, $ -70,000 -64,000 -61,000 -58,000 per year +80,000 +80,000 +80,000 +82,000 ? 2 vs. 1 Overall ROR, i*, % 18.6% 23.1% 20.8% Machines compared 3 vs. 2 4 vs. 3 Incremental investment, $ -16,000 ? -26,000 Incremental cash flow, $ per year +6,000 +3,000 ? ROR on increment, 35.7% Ai*, %

Problem 1: Four different machines were under consideration for materials flow improvement on a drug bottling line. An engineer performed the economic analysis to select the best machine, but some of his calculations were removed from the report by a disgruntled employee. All machines are assumed to have a 10-year life. Select the best machine at MARR = 18% per year, provided one must be chosen. Machine 1 2 3 4 Initial cost, $ ? -60,000 -72,000 -98,000 Annual cost, $ per year Annual savings, $ -70,000 -64,000 -61,000 -58,000 per year +80,000 +80,000 +80,000 +82,000 ? 2 vs. 1 Overall ROR, i, % 18.6% 23.1% 20.8% Machines compared 3 vs. 2 4 vs. 3 Incremental investment, $ -16,000 ? -26,000 Incremental cash flow, $ per year +6,000 +3,000 ? ROR on increment, 35.7% Ai, %

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Problem 1: Four different machines were under consideration for materials flow improvement on a drug bottling line. An engineer performed the economic analysis to select the best machine, but some of his calculations were removed from the report by a disgruntled employee. All machines are assumed to have a 10-year life. (a) Fill in the missing values in the comparison table. (b) Select the best machine at MARR = 18% per year, provided one must be chosen. Machine 1 2 3 4 Initial cost, $ ? -60,000 -72,000 -98,000 Annual cost, $ per year Annual savings, $ -70,000 -64,000 -61,000 -58,000 per year +80,000 +80,000 +80,000 +82,000 Overall ROR, i*, % 18.6% ? 23.1% 20.8% Machines compared 2 vs. 1 3 vs. 2 4 vs. 3 Incremental investment, $ -16,000 ? -26,000 Incremental cash flow, $ per year +6,000 +3,000 ROR on increment, 35.7% ? Ai*, %
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A company that manufactures amplified pressure transducers wishes to decide between the machines shown - variable speed (VS) and dual speed (DS). Determine the range of Ai*, incremental ROR. (i.e. 5%-6%). First cost, $ AOC, $ per year Overhaul in year 3, $ Overhaul in year 4, $ Salvage value, $ Life, years VS -260,000 -230,000 -40,000 55,000 6 O a Ai* vs-ps = 19% - 20% Ob.Ai* vs os = 4%-5% OcAi* vs os = 10% -11% Ⓒd. Ai vs Ds = 17%-18% DS -215,000 -235,000 -24,000 14,000 6
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