Forum Replies Created
- Posts
This scenario relates to two requirements.
Mem Co manufactures a specialist component and is considering buying a replacement machine costing $2.5m. This machine would operate for five years after which time it would be sold for $100,000.
The replacement machine would have a production capacity of 300,000 components per year which is 50,000 more components per year than the existing machine produces. Mem Co is able to sell all components produced.
Other information
•If Mem Co purchased the replacement machine it would require a concrete foundation which would cost $15,000. The site has already been assessed as suitable for the foundation by a surveyor who charged a $3,000 fee. This fee has not yet been paid.
•If the existing machine were scrapped it could be sold for $48,000 cash now. Otherwise it would last for a further five years at which time its scrap value would be zero.
•The selling price of $14 per component would not change if the replacement machine were purchased.
•Variable costs are currently $6.60 per component and the replacement machine’s variable costs would be $5.00 per component
Cash fixed costs would increase by $43,000 per year if the existing machine were replaced.
Mem Co uses a 9% cost of capital to evaluate projects of this type.
(a) Calculate the net present value (NPV) of the replacement machine and conclude whether Mem Co should buy the replacement machine. Show all calculations.
for instance why isnt depreciation taken into account in this question? i understand residual values are inflows but why isnt depreciation adjusted for here?
I have another question relating to this topic. But firstly is there any material I can read on this depreciation adjustment?
I understand that the depreciation is not a cash flow so it needs to be added back inorder for the true cash movement to be realised.
However, while practicing I have realised that this is not the case when scrap or residual value is present.
Is this only when the questions speaks specifically about the inflows being profits?
So I said since the change reflects and increase it means that the company needs more working capital to finance daily activities since most of the companies cash would still be owed.
Thus already proven via new policy is receipt of $45,000 in profit
Currently receivables is 1,200,000/12 months =$100,000
New policy would now go to two months thus 12/2=6 so $1,200,000 /6 * 25% =$250000
The difference between these two is and increase of 150,000So this is where I was confused should I take the cost of capital from this 150,000 or from $250,000
But I decided to take it from the $150,000 got $15000 then subtracted from the $45,000 to get my answer
I am solving the questions but I just don’t think that I understand I am constantly second guessing doing the entire question with uncertainty which means that I really do not understand; I am afraid of going into the exam filled with doubt.
I got an over all increase of $30,000, well pretty much guessed that answer. Based what I worked out but I believe my biggest struggle is figuring out which figure should I take the cost of capital from.
is there any link that i can find with an article on spare capacity; my text book did not have much information but ive been encountering many questions with this included.
Unfortunately not really I mean I subtracted the 150 spare capacity hours from the 400 to get 250 but I do not understand the question so I do not really understand why I did that just did it because of common sense but not of understand of the topic.
This receivables management topic is a bit of a challenge to me: I am not sure if my question would make much sense but why is it 8% of 1315068 the saving in cost of capital and not the 16 mil – 1315068 * 8%?
thanks so much; this was very helpful in esp explaining how the different risk affects the other.
How ever, lets say for a question – “If a Preliminary Estimation of materiality is $2 million, is performance materiality likely to be $1 million or $3 million?
I do not understand the term “Preliminary Estimation”