1 answer

Problem 2: The management of Tech21 Inc. wants to reduce its labor cost by installing a...

Question:

Problem 2: The management of Tech21 Inc. wants to reduce its labor cost by installing a new machine that would free up the ti

Problem 2: The management of Tech21 Inc. wants to reduce its labor cost by installing a new machine that would free up the time of two employees, allowing them to do other production work that is chargeable to customers. Two types of machines could be purchased that would do the job - machine A and machine B. Cost of machine Annual labor cost saving Expected life of machine Machine A $60,000 $10,000 10 years Machine B $40,000 $10,000 4 years Required: Draw a cash flow time line for each machine option. Which is the best machine to purchase according to payback method? The company requires a 3 year or shorter payback period. Which machine would you recommend? What other factors might influence the recommendation decision? List three or more.

Answers

Answer:

Particulars Machine A Machine B
Cost of the machine 60000 40000
Net annual benefit 10000 10000
Life (in years) 10 4
Year Machine A savings Machine A cumulative savings Machine B savings
1 10000 10000 10000
2 10000 20000 10000
3 10000 30000 10000
4 10000 40000 10000
5 10000 50000
6 10000 60000
7 10000 70000
8 10000 80000
9 10000 90000
10 10000 100000
Payback period:
Formula: =Year + (Cumulative return greater than initial outflow-initial outflow)/(Cumulative return greater than initial outflow-Cumulative return for the previous year) 6 years, since the Machine A is able to
cover the investment in 6 years.
4 years, since the Machine A is able to cover the investment in 6 years.
Conclusion/Rank II I
Since, Machine B is able to recover its
expenses in just 4 years.

Answer a. According to the Payback period method, the best option is Machine B since it is able to recover its expenses in just 4 years but Machine A in 6 years.

Answer b. If the company requires a 3 year or shorter period, both the machines are not feasible since in Machine B also atleast 4 years is required to recover the cost.

Answer C:

The other factors that might influence investment decision are as follows:

i. Rate of return on investment;

ii. Long-term useful life of the machine and the ability to generate revenue;

iii. Salvage value of each machines;

iv.

Replacement cost;

.

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