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jasenka [17]
3 years ago
8

Dragon Inc. a NJ based construction firm is evaluating whether to replace an aging machine with a new model. For the old machine

, next year maintenance will cost $1,500, and those costs will double each year. The old machine could be sold today for $4,000 but resale value will decline 50% per year. A new machine model costs $12,000, lasts for 5 years and costs $900/year to maintain. After 5 years the new model could be sold for $1,500. Revenue from Machine is about $8000 annually. If r = 12% and we ignore taxes; should Dragon Inc. replace the old machine? If so, when should it do it?
Business
1 answer:
Vilka [71]3 years ago
8 0

Answer:

It should replace the old machine. In the current accounting period.

Explanation:

We need to perform a relevant cost analysis:

Keep the machine:

F0 = $0

F1 = $1500 maintenance

F2 = $3,000 maintenance

F3 = $6,000 maintenance

F4 = $12,000 maintenance

F5 =$24,000 maintenance + 250 resale value

replace the machine:

F0 = -12,000 purchase + 4,000 sale of old machine = -800

F1 = $900 maintenance

F2 = $900 maintenance

F3 = $900 maintenance

F4 = $900 maintenance

F5 =$900 maintenance + 1,500 resale value

As revenues are the same for each machine, we ignore them. We will only focus on the cost each machine generate:

We solve for the present worth of each machine with a discount rate of 12%

\displaystyle PV_{old} = -\frac{1,500}{1.12} - \frac{3,000}{1.12^2} - \frac{6,000}{1.12^3} - \frac{12,000}{1.12^4} - \frac{23,750}{1.12^5}\\\\\displaystyle PV_{old} = -29,104.15

\displaystyle PV_{new} = -8,000 - \frac{900}{1.12} - \frac{900}{1.12^2} - \frac{900}{1.12^3} - \frac{900}{1.12^4} +  \frac{600}{1.12^5}\\\\\displaystyle PV_{new} = -10,393.16

As the present worth of the new machine is lower, the best decision for the company is to purchase the new machine and sale the old machine.

Delaying this will incur in higher maintenance cost (1,500 - 900)

and a lower recovery value (4,000 - 2,000)

As there is no cost saving for delaying the purchase, it should be made immediately.

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Answer:

The firm will not sell any bundle, the amount of bundle to be sold will be zero.

Explanation

Solution

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We can say, that type of consumers (both) will not buy the pants and coat as a bundle, but will want to buy them separately.

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5 0
3 years ago
SwimFit produces gear for swimmers, including suits, goggles, swim caps, and ear plugs. SwimFit wants to improve the quality of
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Answer:

(E)

Explanation:

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Accounting systems that use standards for product costs are called budgeted cost systems. True False
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Answer:

False.

Explanation:

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In Financial accounting, various business firms or companies use the standard cost systems to determine the variances or differences between the actual (real) cost of goods produced and the estimated cost for the goods that were produced by the company.

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3 years ago
If you are falling behind on your student loan payments, which of the following steps should you take to avoid default?
larisa86 [58]
The correct answer among all the other choices is "Contact your lender." If you are falling behind on your student loan payments, this is the step you should take to avoid default. Thank you for posting your question. I hope this answer helped you. Let me know if you need more help. 
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3 years ago
Read 2 more answers
Rolling Coast Inc. issued BBB bonds two years ago. These bonds provided a yield to maturity (YTM) of 11.5 percent. Long-term ris
vaieri [72.5K]

Answer: 9.2%

Explanation:

The interest rate that Rolling Coast should expect to issue new bonds will be calculated thus:

Firstly, we will calculate the previous risk premium on BBB bonds which will be:

= 11.5% - 8.7% = 2.8%

Then, the new risk premium on BBB bonds will be:

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Then, the interest rate that Rolling Coast should expect to issue new bonds will be:

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= 9.2%

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