Pennsylvania State University Operations And Supply Chain Management Assignment Help - Equipment replacement
Question - Equipment replacement decisions and performance evaluation. Bob Moody manages the Knoxville
plant of George Manufacturing. He has been approached by a representative of Darda Engineering
regarding the possible replacement of a large piece of manufacturing equipment that George uses in
its process with a more efficient model. While the representative made some compelling arguments in
favor of replacing the 3-year old equipment, Moody is hesitant. Moody is hoping to be promoted next
year to manager of the larger Chicago plant, and he knows that the accrual-basis net operating
income of the Knoxville plant will be evaluated closely as part of the promotion decision. The following
information is available concerning the equipment replace
The historic cost of the old machine is $300,000. It has a current book value of $120,000, two
remaining years of useful life, and a market value of $72,000. Annual depreciation expense is
$60,000. It is expected to have a salvage value of $0 at the end of its useful life.
The new equipment will cost $180,000. It will have a two-year useful life and a $0 salvage value.
George uses straight-line depreciation on all equipment.
The new equipment will reduce electricity costs by $35,000 per year, and will reduce direct
manufacturing labor costs by $30,000 per year.
For simplicity, ignore income taxes and the time value of money.
1. Assume that Moodyâ€™s priority is to receive the promotion, and he makes the equipment
replacement decision based on next yearâ€™s accrual-based net operating income. Which alternative
would he choose? Show your calculations.
2. W hat are the relevant factors in the decision? Which alternative is in the best interest of the
company over the next two years? Show your calculations.
3. At what cost of the new equipment would Moody be willing to purchase it? Explain. ...Read Less
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