Question Details

(solution) I need the answers to this spreadsheet, gray boxes only.


I need the answers to this spreadsheet, gray boxes only.


SHAMROCK MANUFACTURING

 

Facts:

 

Old machine historical cost

 

Old machine current book value

 

Remaining useful life of asset (2 years)

 

Annual depreciation

 

straight-line depreciation method

 

Market value

 

Salvage value at end of useful life $150,000 New equipment

 

60,000 Useful life of new equipment (2 years) $90,000 $30,000 Annual depreciation

 

$45,000

 

straight-line depreciation method

 

$36,000 Annual reduction in direct MFG labor costs

 

$15,000

 

Annual reduction in electricity

 

$17,500

 

0 Salvage value at end of useful life

 

0

 

YEAR ONE #1

 

Cash operating costs

 

Direct manufacturing costs

 

Electricity

 

Depreciation

 

Loss on disposal of old machine

 

Total costs New

 

Equipment

 

(replace) Old

 

Equipment

 

(keep) Cost

 

Difference by

 

replacing $0 ($15,000)

 

(17,500)

 

0

 

24,000

 

($8,500) ($15,000)

 

(17,500)

 

24,000

 

($8,500) Discuss #1 and #2 in the

 

analytical section of your

 

case analysis. YEAR TWO #2

 

Cash operating costs

 

Direct manufacturing costs

 

Electricity

 

Depreciation

 

Current disposal price of old machine

 

Total relevant cash flow #3 New

 

Equipment

 

(replace) Old

 

Equipment

 

(keep) (35,000)

 

(36,000)

 

($71,000) "WHAT IF" THE NEW MACHINE ONLY COST -->?

 

WITH THE SAME 2 YEAR USEFUL LIFE 0

 

$0 Cash Outflow

 

by replacing

 

$0

 

(35,000)

 

0

 

(36,000)

 

($71,000) Note: The book value of the

 

old machine $60,000 would

 

be written off as depreciation

 

over 2 years under the keep

 

option, or all at once in the

 

current year under replace

 

option so net effect is the

 

same, so it is irrelevant in

 

this analysis $77,000

 

YEAR ONE New

 

Equipment

 

(replace)

 

Cash operating costs

 

Direct manufacturing costs

 

Electricity

 

Depreciation

 

Loss on disposal of old machine

 

Total costs Old

 

Equipment

 

(keep) (17,500)

 

24,000

 

$6,500 $0 Cost

 

Difference by

 

replacing

 

$0

 

(17,500)

 

0

 

24,000

 

$6,500 Compare #1 and #2 to the

 

"what if" results in #3 in the

 

analytical section of your

 

case analysis. YEAR TWO

 

New

 

Equipment

 

(replace)

 

Cash operating costs

 

Direct manufacturing costs

 

Electricity

 

Depreciation

 

Current disposal price of old machine

 

Total relevant cash flow Old

 

Equipment

 

(keep) $0 (36,000)

 

($36,000) 0

 

$0 Cash Outflow

 

by replacing

 

$0

 

0

 

0

 

(36,000)

 

($36,000) In the conclusion section

 

of your case analysis, in

 

your opinion, what

 

decision should be

 

made?

 


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Sep 13, 2020

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