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Skiboards, Inc. has two divisions. The Boards Division makes the board that is made into Skiboards by the Ski Division, but the Board Division can also sell the boards it makes to outside customers. In 2011, The Boards Division reported the following information:

Selling price per board \$ 52
Variable costs per board \$ 22

Number of boards:
Produced in 2011 10,000
Sold to the Ski Division 8,000
Sold to outside customers 2,000

Sales from the Boards Division to the Ski Division were made at the same price that sales were made to outside customers. The Ski Division incurred an additional \$100 per board in variable costs in shaping the boards into Skiboards and then sold the finished Skiboards for \$300 each.

A. Prepare income statements for the Boards Division, the Ski Division, and for Skiboards, Inc.
B. Assume that the Boards Division's manufacturing capacity is limited to 10,000 boards per year and that next year, the Ski Division wants to buy 9,000 boards from the Boards Division instead of the 8,000 boards that it bought in 2011 (the Boards Division is the only place that the Ski Division can buy these boards). From the standpoint of the company as a whole, should the Boards Division sell the 1,000 additional boards to the Ski Division or continue to sell those boards to outside customers?

#### Solution Summary

Skiboards, Inc. has two divisions. The Boards Division makes the board that is made into Skiboards by the Ski Division, but the Board Division can also sell the boards it makes to outside customers. In 2011, The Boards Division reported the following information:

\$2.19

## Capital Budgeting: Replacement Decision

Clegg is replacing one of his machines. He can choose between machine A or machine B. Details of the machines are as follows... Please see attached.

Required:

a) Calculate the accounting rate of return (ARR) for each machine.
b) Calculate the payback period for each machine.
c) Calculate the net present value (NPV) of each machine.

The new machine must produce an internal rate of return (IRR) of at least 22%
d) Prepare calculations to show the internal rate of return (IRR) produced by each machine.
e) State which machine Clegg should purchase. Give your reasons
f) Suggest why Clegg requires the new machine to produce an IRR of at least 22% if it already produces a positive NPV.

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