Sinclair company
Overview: Sinclair Company is considering the purchase of new equipment to perform operations currently being performed on different, less efficient equipment. The purchase price is $250,000, delivered installed.
Sinclair production engineer estimates that the new equipment will produce savings of $72,000 in labor and other direct costs annually, as compared with the present equipment. She estimates the proposed equipment's economic life at five years, with zero salvage value. The present equipment is in good working order and will last, physically, for at least five more years.
The company can borrow money at 9 percent, although it would not plan to negotiate a loan specifically for the purchase of this equipment. The company requires a return of at least 15 percent before taxes on an investment of this type. Taxes are to be disregarded.
Main Problem:
Should we replace existing equipment with more efficient, newer equipment?
Brief Action Plan:
I. Rate of return (cost saving - depreciation/ Initial investment) = 72, 000 - 50,000* 22,000 8.8 % = = 250,000 250,000
*250,000/5 years= $50,000 per year Although numbers are just a guide to the overall impact, considering the purchase of new equipment to perform operations currently being performed under less efficient equipment would belly a rate of return of 8.8 % which is below the company's target of at least 15 percent before taxes on investment of this type. On the other hand when it comes to bank loan a maximum figure of 9% was projected and in no way substantial to the rate of return amount, which is 8.8%
B. Replacement Following Earlier Replacement
II. Rate of return (cost saving - depreciation/ Initial investment) = 160,000 - 100,000* 60,000 12 % =
Sinclair production engineer estimates that the new equipment will produce savings of $72,000 in labor and other direct costs annually, as compared with the present equipment. She estimates the proposed equipment's economic life at five years, with zero salvage value. The present equipment is in good working order and will last, physically, for at least five more years.
The company can borrow money at 9 percent, although it would not plan to negotiate a loan specifically for the purchase of this equipment. The company requires a return of at least 15 percent before taxes on an investment of this type. Taxes are to be disregarded.
Main Problem:
Should we replace existing equipment with more efficient, newer equipment?
Brief Action Plan:
I. Rate of return (cost saving - depreciation/ Initial investment) = 72, 000 - 50,000* 22,000 8.8 % = = 250,000 250,000
*250,000/5 years= $50,000 per year Although numbers are just a guide to the overall impact, considering the purchase of new equipment to perform operations currently being performed under less efficient equipment would belly a rate of return of 8.8 % which is below the company's target of at least 15 percent before taxes on investment of this type. On the other hand when it comes to bank loan a maximum figure of 9% was projected and in no way substantial to the rate of return amount, which is 8.8%
B. Replacement Following Earlier Replacement
II. Rate of return (cost saving - depreciation/ Initial investment) = 160,000 - 100,000* 60,000 12 % =