Executive SummaryHansen Company currently studys to decide whether to happen both lathes and wiz irksome mill, or to replace the cardinal lathes and one boring mill with two smart lathes. Continuing subprogram without an come about is not an option. As fiscal analysts, we have soundly examined the data that was given to us, and found that a complete relief of the old lathes and the boring mill is a come apart financial decision for the company. Our decision is based on the computations of the Net represent Value (NPV) of the additive cash flows involved with both options. The NPV we obtained for the incremental cash flows of the replacement option is $711.85, compared to the NPV of the overhaul option, which equals a prejudicious $4438.62. We have concluded that the replacement project is a better investment.
IntroductionCurrently, Hansen Company is victimization two metal lathes and one boring mill to produce sewer and housing connection couplings. The two lathes were purchased six years ago for a combined chalk up of $28,571, and are being depreciated using the straight-line method with an annual expenditure of $3,095 a year. They currently have a net platter of value of $5,000 each, and the boring mill has no book value.
We need to decide whether it will be more profitable to overhaul the current machines, or to replace the three machines with two new lathes. We will evaluate the incremental cash flows of both projects and delineate which project to accept and which to reject.
Overhaul OptionThe cost involved to overhaul the current machines is $14,300 ($6,700 for each lathe and $900 for the boring mill). This cost will summation the book value of the machines to $24,300, and will then be depreciated using straight-line depreciation over six years. The annual depreciation disbursal will then be...
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