Managerial Accounting: Creating Value in a Dynamic Business Environment
12th Edition
ISBN: 9781260417074
Author: HILTON, Ronald
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Textbook Question
Chapter 16, Problem 49P
Philadelphia Fastener Corporation manufactures nails, screws, bolts, and other fasteners. Management is considering a proposal to acquire new material-handling equipment. The new equipment has the same capacity as the current equipment but will provide operating efficiencies in labor and power usage. The savings in operating costs are estimated at $150,000 annually.
The new equipment will cost $300,000 and will be purchased at the beginning of the year when the project is started. The equipment dealer is certain that the equipment will be operational during the second quarter of the year it is installed. Therefore, 60 percent of the estimated annual savings can be obtained in the first year. The company will incur a one-time expense of $30,000 to transfer production activities from the old equipment to the new equipment. No loss of sales will occur, however, because the processing facility is large enough to install the new equipment without interfering with the operations of the current equipment. The equipment is in the MACRS 7-year property class. The firm would depreciate the machinery in accordance with the MACRS depreciation schedule.
The current equipment has been fully depreciated. Management has reviewed its condition and has concluded that it can be used an additional eight years. The company would receive $10,000, net of removal costs, if it elected to buy the new equipment and dispose of its current equipment at this time. The new equipment will have no salvage value at the end of its life. The company is subject to a 40 per cent income-tax rate and requires an after-tax return of at least 12 percent on any investment.
Requited:
- 1. Calculate the annual incremental after-tax
cash flows for Philadelphia Fastener Corporation’s proposal to acquire the new equipment. - 2. Calculate the
net present value of the proposal to acquire the new equipment using the cash flows calculated in requirement (1), and indicate what action management should take. Assume all cash flows take place at the end of the year.
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Philadelphia Fastener Corporation manufactures nails, screws, bolts, and other fasteners. Management is considering a proposal to acquire new material-handling equipment. The new equipment has the same capacity as the current equipment but will provide operating efficiencies in labor and power usage. The savings in operating costs are estimated at $150,000 annually.The new equipment will cost $300,000 and will be purchased at the beginning of the year when the project is started. The equipment dealer is certain that the equipment will be operational during the second quarter of the year it is installed. Therefore, 60 percent of the estimated annual savings can be obtained in the first year. The company will incur a one-time expense of $30,000 to transfer production activities from the old equipment to the new equipment. No loss of sales will occur, however, because the processing facility is large enough to install the new equipment without interfering with the operations of the…
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Chapter 16 Solutions
Managerial Accounting: Creating Value in a Dynamic Business Environment
Ch. 16 - Prob. 1RQCh. 16 - Prob. 2RQCh. 16 - Prob. 3RQCh. 16 - Prob. 4RQCh. 16 - Prob. 5RQCh. 16 - Explain the following terms: recovery of...Ch. 16 - List and briefly explain two advantages that the...Ch. 16 - List and briefly explain four assumptions...Ch. 16 - Prob. 9RQCh. 16 - Prob. 10RQ
Ch. 16 - Give an example of a noncash expense. What impact...Ch. 16 - Prob. 12RQCh. 16 - What is a depreciation tax shield? Explain the...Ch. 16 - Prob. 14RQCh. 16 - Why is accelerated depreciation advantageous to a...Ch. 16 - Prob. 16RQCh. 16 - Why may the net-present-value and...Ch. 16 - Prob. 18RQCh. 16 - What is meant by the term payback period? How is...Ch. 16 - Prob. 20RQCh. 16 - How is an investment projects accounting rate of...Ch. 16 - Prob. 22RQCh. 16 - Prob. 23RQCh. 16 - Prob. 24ECh. 16 - Refer to the data given in the preceding exercise....Ch. 16 - Prob. 26ECh. 16 - Prob. 28ECh. 16 - Prob. 29ECh. 16 - Prob. 30ECh. 16 - Prob. 31ECh. 16 - Prob. 32ECh. 16 - Sharpe Machining Company purchased industrial...Ch. 16 - The owner of Atlantic City Confectionary is...Ch. 16 - The management of Niagra National Bank is...Ch. 16 - Allegience Insurance Companys management is...Ch. 16 - Prob. 37ECh. 16 - Prob. 38ECh. 16 - The states Secretary of Education is considering...Ch. 16 - The supervisor of the county Department of...Ch. 16 - Prob. 41PCh. 16 - Prob. 42PCh. 16 - Prob. 43PCh. 16 - Special People Industries (SPI) is a nonprofit...Ch. 16 - Washington Countys Board of Representatives is...Ch. 16 - Prob. 46PCh. 16 - Prob. 47PCh. 16 - Mind Challenge, Inc. publishes innovative science...Ch. 16 - Philadelphia Fastener Corporation manufactures...Ch. 16 - Prob. 50PCh. 16 - Prob. 51PCh. 16 - Prob. 52PCh. 16 - Prob. 53PCh. 16 - Prob. 54PCh. 16 - Prob. 55PCh. 16 - Prob. 56PCh. 16 - Pensacola Cablevision Company provides television...Ch. 16 - Pensacola Cablevision Company provides television...Ch. 16 - The board of education for the Central Catskill...Ch. 16 - Prob. 60C
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