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# Capital Budgeting for a new computerized assembly line

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Propose to launch a new computerized assembly line, which costs \$5,000,000, for replacing the existing assembly line. If replace the existing assembly line would result in a before-tax reduction of cash expenses by \$1,200,000 per year.

The new assembly line will be fully depreciated by the simplified straight-line method over its five-year depreciable life. It is estimated that the new assembly line will be valueless in five years.

The existing assembly line has five years remaining before it will be fully depreciated and has a book value of \$769,680.

If sold today, the company would also receive \$769,680 for the existing machine. However, it is estimated that the existing assembly line will be valueless in five years.
If marginal tax bracket is 17% and has a required rate of return of 15%.

1. Before analysing whether B&M's Company should pay for the new assembly line, please determine which of the following items are incremental cash flows that should be incorporated into a NPV calculation. Please explain:
&#61482; the purchase price of the existing assembly line, \$1,200,000, ten years ago;
&#61482; The cost of research, \$23,000, for evaluating different models of the required assembly line.
2. What is the initial outlay associated with this project?
3. What are the annual after-tax cash flows associated with this project, for years 1 through 4 and the terminal cash flow in year 5?

#### Solution Preview

Capital Budgeting
Propose to launch a new computerized assembly line, which costs \$5,000,000, for replacing the existing assembly line. If replace the existing assembly line would result in a before-tax reduction of cash expenses by \$1,200,000 per year.

The new assembly line will be fully depreciated by the simplified straight-line method over its five-year depreciable life. It is estimated that the new assembly line will be valueless in five years.

The existing assembly line has five years remaining before it will be fully depreciated and has a book value of \$769,680.

If ...

#### Solution Summary

This solution is comprised of a detailed explanation and calculation to answer as to whether the company should replace the new computerized assembly line.

\$2.19

## Production Manager topics: technology, facility layout, franchising, operations

Assume you are the production manager for a small machine shop that manufactures precision parts for industrial equipment. How would you address the following set of questions:

1. Can you use CAD, CAE, CAM, CIM, and FMS to nmanufacture better parts more easily?

2. If your final product requires several unique subunits that are all produced with different machinery and in differing lengths of time, what facility layout will you choose and why?

3. Look up on the Internet "franchising". Based on your readings, from an operational perspective, why is purchasing a franchise such as Wendy's or Jiffy Lube an attractive alternative for starting a business?

4. What things could you learn about a company's culture by observing the layout and design of its production facility? Discuss both goods and services operations.

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