company is expecting to have a large increase in demand for the product and is anxious to expand
its productive capacity. Two possibilities are under consideration:
Alternative 1. Purchase another model 400 shaping machine to operate along with the currently
owned model 400 machine.
Alternative 2. Purchase a model 800 shaping machine and use the currently owned model 400
machine as standby equipment. The model 800 machine is a high-speed unit with double the
capacity of the model 400 machine.
The following additional information is available on the two alternatives:
a. Both the model 400 machine and the model 800 machine have a 10-year life from the time
they are fi rst used in production. The scrap value of both machines is negligible and can be
ignored. Straight-line depreciation is used.
b. The cost of a new model 800 machine is $300,000.
c. The model 400 machine now in use cost $160,000 three years ago. Its present book value is
$112,000, and its present market value is $90,000.
d. A new model 400 machine costs $170,000 now. If the company decides not to buy the
model 800 machine, then the old model 400 machine will have to be replaced in seven
years at a cost of $200,000. The replacement machine will be sold at the end of the tenth
year for $140,000.
e. Production over the next 10 years is expected to be:
1 . . . . . . . . . . . . 40,000
2 . . . . . . . . . . . . 60,000
3 . . . . . . . . . . . . 80,000
4–10 . . . . . . . . . . 90,000
f. The two models of machines are not equally effi cient. Comparative variable costs per unit are:
Direct materials per unit. . . . . . . . . . . $0.25 $0.40
Direct labor per unit . . . . . . . . . . . . . . 0.49 0.16
Supplies and lubricants per unit . . . . 0.06 0.04
Total variable cost per unit. . . . . . . . . $0.80 $0.60
g. The model 400 machine is less costly to maintain than the model 800 machine. Annual repairs
and maintenance costs on a model 400 machine are $2,500.
h. Repairs and maintenance costs on a model 800 machine, with a model 400 machine used as
standby, would total $3,800 per year.
i. No other costs will change as a result of the decision between the two machines.
j. Kingsley Products has a 20% required rate of return on all investments.
(Ignore income taxes.)
1. Which alternative should the company choose? Use the net present value approach.
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