Explore BrainMass

Net present value qualitative issues

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

ABC Company is a company that employs only people with physical or mental disabilities. One of the organization's activities is to make cookies for its snack food store. Several years ago, ABC Company purchased a special cookie-cutting machine. As of December 31, 2010, this machine will have been used for three years.

Management is considering the purchase of a newer, more efficient machine. If purchased, the new machine would be acquired on December 31, 2010. Management expects to sell 300,000 dozen cookies in each of the next six years. The selling price of the cookies is expected to average $1.15 per dozen.

The ABC Company has two options:
1. Continue to operate the old machine, or
2. Sell the old machine and purchase the new machine.

No trade-in was offered by the seller of the new machine. The following information has been assembled to help management decide which option is more desirable.
Old New
Machine Machine
Original cost of machine at acquisition..........................$80,000 $120,000
Remaining useful life as of December 31, 2010...... 6yrs 6yrs
Expected annual cash operating expenses:
Variable cost per dozen.................................... $.38 $.29
Total fixed costs............................................ $21,000 $11,000

Assume that all operating revenues and expenses occur at the end of the year.

1. Use the net-present-value method to determine whether the ABC Company should retain the old machine or acquire the new machine. The organization's hurdle rate is 16 percent.
2. Independent of your answer to requirement (1), suppose the quantitative differences are so small between the two alternatives that management is indifferent between the two proposals. Write a memo to the president of SPI that identifies and discusses any non-quantitative factors that management should consider.

© BrainMass Inc. brainmass.com October 25, 2018, 7:52 am ad1c9bdddf

Solution Preview

Dear student,
The question 1 full breakdown of solutions is in the attached Excel file.

1) The net present value is calculated to be $69,641, so the new machine ...

Solution Summary

The solution looks at net present values of qualitative issues.

See Also This Related BrainMass Solution

Quantitative and Qualitative Measures

Ken was in a science documentary with ten other children. His mother, Jane, believes he was not shown as positively, or given as much time in the documentary, as the others were.

Assume you are hired to analyze the Ken's mother's claim, and you find she is correct in her belief, what are the qualitative and quantitative measures that could help support Jane's claims? How might the people who created the documentary avoid this error in future documentaries?

View Full Posting Details