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Gnoma [55]
3 years ago
14

Bailey, Inc., is considering buying a new gang punch that would allow them to produce circuit boards more efficiently. The punch

has a first cost of $100,000 and a useful life of 15 years. At the end of its useful life, the punch has no salvage value. Labor costs would increase $2,000 per year using the gang punch, but raw material costs would decrease $12,000 per year. MARR is 5 %/year.
a) What is the discounted payback period for this investment?
b) If the maximum attractive DPBP is 3 years, what is the decision rule for judging the worth of this investment?
c) Should Bailey buy the gang punch based on DPBP?
Business
1 answer:
KengaRu [80]3 years ago
6 0

Answer:

initial investment $100,000

useful life 15 years

cash flow per year = -$2,000 + $12,000 = $10,000

discount rate 5%

discounted cash flow:

1                $10,000/1.05 = $9,524

2               $10,000/1.05² = $9,070

3               $10,000/1.05³ = $8,638

4               $10,000/1.05⁴ = $8,227

5               $10,000/1.05⁵ = $7,835

6               $10,000/1.05⁶ = $7,462

7               $10,000/1.05⁷ = $7,101

8               $10,000/1.05⁸ = $6,768

9               $10,000/1.05⁹ = $6,446

10              $10,000/1.05¹⁰ = $6,139

11               $10,000/1.05¹¹ = $5,847

12              $10,000/1.05¹² = $5,568

13              $10,000/1.05¹³ = $5,303

14              $10,000/1.05¹⁴ = $5,051

15              $10,000/1.05¹⁵ = $4,810

A) discounted pay back period = 14.2 years

B) if the decision rule is a discounted payback period of 3 years, then the project should be rejected

C) the decision rule should be the NPV, which is actually positive since the DPBP is less than 15 years. Only companies that fear premature obsolescence should base their decision on the pay back period. Since this is an electronics company, it is sound to use the pay back period as a decision parameter besides the NPV.

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1.                                                                   Materials       Conversion Costs

Total equivalent units of production        17,200                  15,800  

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Weighted-Average Method

1. Equivalent Units

Particulars              Units       % of Completion       Equivalent Units

                                     Materials Conversion   Materials Conversion

Transferred Out    13,700     100         100             13,700      13,700

<u>Ending Inventory     3500      100          60             3500        2100    </u>

<u>Total Equivalent Units                                             17,200      15,800  </u>

<em>The Ending Inventory  units are 3500 which are not yet complete. </em>

                                                                   Materials       Conversion Costs

Total equivalent units of production        17,200                  15,800  

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Cost Added                               69,660                18,480 + 22,600

                             

Total Costs                                69,660                  41,080

Equivalent Units                       <u> 17,200                    15,800 </u>

Cost per Equivalent Unit             69,660 / 17,200         41,080/ 15,800  

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<u>Transferred Out             $ 55,485              $ 35620</u>

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<u>Cost Added                               69,660                18,480 + 22,600</u>

<u>Total Costs                                69,660                  41,080</u>

<u></u>

These costs reconcile with the given costs.

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