The Managerial Accounting Department at your company has been engaged by the Production Department for assistance in evaluating a purchase decision. The equipment the production department is currently utilizing is outdated and has become costly to maintain. New machines would also provide increased efficiencies leading to increased sales. Due to this, the department is considering replacing all equipment with new machines.
Data:
- Cost of Current Machines: $800,000
- Cost of New Machines: $1,250,000
- Annual Maintenance on Current Machines: $125,000
- Annual Maintenance on New Machines: $54,000
- Salvage Value of Current Machines: $325,000
- Immediate employee training cost on new machines: $15,000 - Working Capital needed for new machines: $50,000
- Would be needed once machines are purchased and working capital released after 5 years
- Increased sales opportunity provided by new machines: $200,000 first year and growing at 5% per year after
- Company’s Required Rate of Return: 10%
- Contribution margin: 47%
- Depreciation and income taxes should be ignored.
Given the financial information listed above, provide the following :
- An Excel worksheet showing the annual cash flows by line-item and in total for the keep vs. purchase decision, for 8 years.
Calculate the NPV in excel
Should the Department purchase new equipment or maintain the current equipment?