CNC Economics Assingment Help With Solution
1. A company has a CNC (computer numeric controlled) precision metal cutting machine and is considering a replacement for the machine. If repaired and reprogrammed with new software, the existing machine can be used for another 5 years. The existing machine will have no salvage value at the end of 5 years if kept for that period; however, the firm can sell the existing machine today to another firm for $4,500. If the existing machine is kept, it will require an immediate $2,000 overhaul to enable continued operation. (The overhaul will not extend the service life beyond 5 years or increase the value of the existing machine). Operating costs for the existing machine are estimated at $1,500 for the first year and will increase by $500 each year after the first.
A new machine with the same capabilities as the existing machine will cost $10,000 and will have operating costs of $1,500 for the first year. For each additional year (after the first year) the new machine is used, its operating costs will increase by $750 over the previous year’s operating costs. The new machine’s salvage value is $7,500 after one year and declines by 15% from the previous year’s salvage value each year.
The firm’s MARR is 12%. Should the existing CNC machine be replaced now?
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2. A plant expansion plan calls for the installation of additional production equipment to increase parts production. The equipment needed for the expansion costs $350,000 and will generate annual revenues of $100,000. Operation of the equipment requires (annually) $20,000 in labor, $15,000 in material and $5,000 in power and utility costs. The equipment will be classified as a 7-year MACRS property. The company will stop using the equipment at the end of 5 years, at which time it will be sold for $75,000.
a) Find the year-by-year after tax net cash flow for the project at a 35% marginal tax rate based on the net income. Prepare a table similar to Table 10.2 in the text to display your calculations. You may prepare the table either manually or by using Excel.
b) Determine the after-tax net present worth of the project if the firm’s MARR is 10%. Be sure to include a cash flow diagram and indicate the formulas used to “solve” the cash flow diagram to find NPW. Do you recommend that the firm make the investment in plant expansion?
3. Your firm has negotiated a five-year lease on mineral rights. The annual cost stated in the lease is $250,000, to be paid at the beginning of each of the 5 years. The general inflation rate, f, is 1.7%. Find the equivalent cost of the lease in constant dollars for each of the 5 years. Arrange your computations in a table as shown below:
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