MREGC5001- Installation and Replacement

Task:

Q.1. Explain how Annual worth, Present worth and Internal Rate of Return (IRR) are used in capital investment decisions.

A manufacturing process can be designed for varying degrees of automation. The following is relevant cost information:

Organisation has a contract to supply 5000 units per year with a contract sale price of $3 for each item. Determine which is the best option after-tax analyses using a tax rate of 30% and a minimum attractive after-tax rate of return of 10% and straight-line depreciation. Assume each alternative has a life of 6 years and 5% of original price as salvage value after end of the life. Use each of the following methods:

(a) Annual worth.

(b) Present worth.

(c) Internal Rate of Return (IRR).

Use excel and attach file as embedded file in word document/ upload file in Moodle for your analysis.

Q.2. What are the conventional and modified Benefit to Cost ratios and how these are used in capital investment decisions. Check in your workplace where equipment can be replaced by alternative brand with different price to buy and/ or different salvage value/ resale value/ disposal cost at the end of life, might have different cost to operate due to different energy rating, power consumption, spare parts etc. and different capacity/ production rate and/ or quality resulting different price of products from alternative options.

Alternatively consider that two alternative machines will produce the same product, but one will produce higher quality items which can be expected to return greater revenue. Given the following data, determine which machine is better. Use the B/C method, a study period of 10 years, and a MARR of 10%\

Determine the B/C values for each machine by using both the conventional and the modified formulations. Use excel and attach file as embedded file in word document/ upload file in Moodle for your analysis.

Q3. Your company has to obtain some new production equipment to be used for the next ten years, and leasing is being considered. You have been directed to perform an after-tax study of the leasing approach. The data information for the study is as follows:

Lease cost: First year, $80,000; second year, $60,000; third through ten years, $50,000 per year. Assume that a 10-year contract has been offered by the lessor that fixes these costs over the 10- year period. Other costs (ouside the contract) are $4,000 per year. The effective income tax rate is 30%.

1- Develop the Annual After-tax Cash Flow (ATCF’s) for the leasing alternative.

2- If the Minimum Attractive Rate of Return (MARR) after taxes is 10%, what is the equivelant annual cost for the leasing alternative?

Q4. Machine X has been used for 10 years and currently has a book value of $20,000. A decision must be made concerning the most economic action to take: keep X, replace X with Y or replace X with Z. A before-tax analysis is to be performed. If machine X is continued in service, it can be used for 10 years and scrapped at zero value. Annual operating and maintenance costs will equal to $90,000.

If machine X is replaced with machine Y, a trade-in allowance of $20,000 will be provided for X. The original purchase price for Y, excluding the trade-in allowance, is $120,000. At the end of the 10 year planning horizon, Y will have a salvage value of $30,000. Annual operating and maintenance costs will total $70,000.

If machine X is replaced with machine Z, no trade-in allowance will be provided for X. The purchase price for Z is $160,000. At the end of the 10-year planning horizon, Z will have a salvage value of $50,000. Annual operating and maintenance costs will total $60,000.

Using a MARR of 10% and a before-tax analysis, determine the preferred course of action. Use excel and attach file as embedded file in word document/ upload file in Moodle for your analysis. 

Q5. For this assignment students will be expected to present grammatically correct work that contains reasoned arguments. Students should demonstrate that they have read and understood the study material. In total, the submissions for this assignment should amount to between 1000 and 1500 words.

You need to prepare a report/technical paper starting from report/ technical paper submitted in assignment 1 to provide

1. Introduction with context of your organisation

2. Gaps identified in Life cycle costing

3. Recommendation for improvement for cost/benefit and risk management.

4. Supporting documents from your organisation as Appendix

5. References

6. Voice embedded Power Point slides (within 3 to 5 slides to share your contribution to stakeholders)