Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed
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- 13.21 Capital budgeting, computer-integrated manufacturing (CIM), sensitivity. (25 min) 1
| Total present value Present- value discount factor at 18% Sketch of relevant cash flows End of year 0 1 2 3 4 1 Initial machine investment £(44,000) 2 Current disposal price of old machine £5,000 Net initial investment £(39,000) ←− 1.000 ←−−− £(39,000) 3 Recurring operating cash savings 2.690 ←−−−−−−−−−−−−− £18,500 £18,500 £18,500 £18,500 4 Difference in terminal disposal prices of machines (1,342) ←− 0.516 ←−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−− Net present value £9,423 Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5 th Edition, Instructor’s Manual © Pearson Education Limited 2012 Note the cash outflow of £2,600 from the difference in terminal disposal prices of machines. The relevant cash flow equals the difference in terminal disposal prices of the two machines. If the toy manufacturer continues to use the old machine, it will receive £2,600 on disposal of its machine at the end of year 4. If it switches to the new machine, it will receive £0 on disposal at the end of year 4. Hence, by investing in the new machine instead of continuing with the old one, the toy manufacturer forgoes £2,600 in terminal disposal price. Hence, £2,600 appears as a cash outflow in year 4 in the sketch of relevant cash flows. 2 The uniform payback formula can be used because the operating savings are uniform Payback period = Net initial investment Uniform increase in annual cash inflow £5,000 = = 2.1 years £18,500 P – The £5,000 current disposal price of the moulding machine is deducted from the £44,000 cost of the automatic machine to determine the net initial investment in the automatic machine. 3 This is an example of sensitivity analysis Note that the net initial investment and the difference in terminal disposal prices of machines are unaffected and hence, are included in the equation at the present values that we calculated earlier. The present value of an annuity of £1 received at the end of each year for 4 years is 2.690. 2.690X = £40,342 X = £14,997 If the annual savings fall by £3,503, from the estimated £18,500 to £14,997, the point of indifference will be reached. (Rounding errors may affect the calculation slightly) Because the annual operating savings are equal, an alternative way to get the same answer is to divide the net present value of £9,423 by 2.690 (see Table 4 of Appendix B, obtaining £3,503; £3,503 is the amount of the annual difference in savings that will eliminate the £9,423 of net present value. Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5 th Edition, Instructor’s Manual © Pearson Education Limited 2012 13.21 Capital budgeting, computer-integrated manufacturing (CIM), sensitivity. (25 min) 1 The net present-value analysis of the CIM proposal is as follows. We consider the differences in cash flows if the machine is replaced. All values in millions. Download 1.72 Mb. Share with your friends:
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