1.
Calculate the after-tax cash flows for the manual and robotic systems by preparing a schedule.
1.
Explanation of Solution
Calculate the after-tax cash flows for the manual and robotic systems by preparing a schedule:
For manual systems:
Year | Revenue | Expenses | Cash flow | |
(1) (a) | (2) (b) | (3) (c) | ||
1 | $240,000 | ($180,000) | $8,000 | $68,000 |
2 | $240,000 | ($180,000) | $8,000 | $68,000 |
3 | $240,000 | ($180,000) | $8,000 | $68,000 |
4 | $240,000 | ($180,000) | $8,000 | $68,000 |
5 | $240,000 | ($180,000) | $8,000 | $68,000 |
6 | $240,000 | ($180,000) | $8,000 | $68,000 |
7 | $240,000 | ($180,000) | $8,000 | $68,000 |
8 | $240,000 | ($180,000) | $8,000 | $68,000 |
9 | $240,000 | ($180,000) | $8,000 | $68,000 |
10 | $240,000 | ($180,000) | $8,000 | $68,000 |
Table (1)
Working note (1):
Compute the amount of annual revenue:
Working note (2):
Compute the amount of expense:
Working note (3):
Compute the amount of after tax depreciation expense:
For robotic systems:
Year | Revenue | Expenses | Depreciation after tax | Other expenses (9) | Cash flow |
(4) (a) | (7) (b) | (8) (c) | |||
$64,000 | $(480,000) | $(416,000) | |||
1 | $240,000 | ($124,320) | $29,723 | - | $145,403 |
2 | $270,000 | ($132,960) | $50,939 | - | $187,979 |
3 | $300,000 | ($141,600) | $36,379 | - | $194,779 |
4 | $360,000 | ($158,880) | $25,979 | - | $227,099 |
5 | $360,000 | ($158,880) | $18,574 | - | $219,694 |
6 | $360,000 | ($158,880) | $18,554 | - | $219,694 |
7 | $360,000 | ($158,880) | $18,554 | - | $219,694 |
8 | $360,000 | ($158,880) | $9,277 | - | $210,397 |
9 | $360,000 | ($158,880) | - | - | $201,120 |
10 | $372,000 | ($158,880) | - | - | $213,120 |
Table (2)
Working Note (4):
Compute the amount of revenue:
Year | Sales | Revenue | |
(a) | (b) | ||
1 | $400,000 | 60% | $240,000 |
2 | $450,000 | 60% | $270,000 |
3 | $500,000 | 60% | $300,000 |
4 | $600,000 | 60% | $360,000 |
5 | $600,000 | 60% | $360,000 |
6 | $600,000 | 60% | $360,000 |
7 | $600,000 | 60% | $360,000 |
8 | $600,000 | 60% | $360,000 |
9 | $600,000 | 60% | $360,000 |
10 | $620,000 | 60% | $372,000 |
Table (3)
Working Note (5):
Compute the fixed expense:
Working Note (6):
Compute the total variable expense percentage:
Particulars | Cost as a % of sales | |||
(a) | (b) | |||
Direct materials | 75% | 60% | ||
Variable overhead | 66.67% | 60% | ||
Variable selling | 90% | 60% | ||
Total |
Table (4)
Working Note (7):
Compute the amount of expense:
Year | Sales units | Variable cost % (6) | Fixed cost (5) | Expense |
(a) | (b) | (c) | ||
1 | $400,000 | 0.1728 | 55,200 | ($124,320) |
2 | $450,000 | 0.1728 | 55,200 | ($132,960) |
3 | $500,000 | 0.1728 | 55,200 | ($141,600) |
4 | $600,000 | 0.1728 | 55,200 | ($158,880) |
5 | $600,000 | 0.1728 | 55,200 | ($158,880) |
6 | $600,000 | 0.1728 | 55,200 | ($158,880) |
7 | $600,000 | 0.1728 | 55,200 | ($158,880) |
8 | $600,000 | 0.1728 | 55,200 | ($158,880) |
9 | $600,000 | 0.1728 | 55,200 | ($158,880) |
10 | $620,000 | 0.1728 | 55,200 | ($158,880) |
Table (5)
Working note (8):
Step 1: Compute the depreciation expenses after tax:
Calculate the amount of depreciation expenses under MARCS:
Year | Initial investments | Deprecation rate | MACRS for 7 years | Depreciation |
(a) | (b) | (c) | ||
1 | $520,000 | 40% | 0.1429 | $29,723 |
2 | $520,000 | 40% | 0.2449 | $50,939 |
3 | $520,000 | 40% | 0.1749 | $36,379 |
4 | $520,000 | 40% | 0.1249 | $25,979 |
5 | $520,000 | 40% | 0.893 | $18,574 |
6 | $520,000 | 40% | 0.892 | $18,554 |
7 | $520,000 | 40% | 0.893 | $18,554 |
8 | $520,000 | 40% | 0.446 | $9,277 |
Table (6)
Compute the amount of net investment:
2.
Ascertain the net present value for each system and describe whether it is advisable for the company to invest in the robotic system or manual systems.
2.
Explanation of Solution
Ascertain the net present value for each system and describe whether it is advisable for the company to invest in the robotic system as follows:
For manual systems:
Year | Cash flow | Discount factor @ 12% | Cash flow |
(a) | (b) | ||
0 | 0 | 1.000 | 0 |
1 | $68,000 | 0.893 | $60,724 |
2 | $68,000 | 0.797 | $54,196 |
3 | $68,000 | 0.712 | $48,416 |
4 | $68,000 | 0.636 | $43,248 |
5 | $68,000 | 0.567 | $38,556 |
6 | $68,000 | 0.507 | $34,476 |
7 | $68,000 | 0.452 | $30,736 |
8 | $68,000 | 0.404 | $27,472 |
9 | $68,000 | 0.361 | $24,480 |
10 | $68,000 | 0.322 | $21,896 |
Net present value | $384,200 |
Table (7)
For robotic systems:
Year | Cash flow | Discount factor @ 12% | Cash flow |
(a) | (b) | ||
0 | $(416,000) | 1.000 | $(416,000) |
1 | $145,403 | 0.893 | $129,845 |
2 | $187,979 | 0.797 | $149,819 |
3 | $194,779 | 0.712 | $138,683 |
4 | $227,099 | 0.636 | $144,435 |
5 | $219,694 | 0.567 | $124,566 |
6 | $219,694 | 0.507 | $111,385 |
7 | $219,694 | 0.452 | $99,302 |
8 | $210,397 | 0.404 | $85,000 |
9 | $201,120 | 0.361 | $72,604 |
10 | $213,120 | 0.322 | $68,625 |
Net present value | $708,255 |
Table (8)
From the above calculation it is clear that the net present value of robotic systems is higher than the net present value of manual systems. Hence, the company should invest in the robotic system.
3.
Ascertain the net present value for the given situation using 12 % and 20 % discount factors, and describe whether the robotic system would be acquired if 20% is used. State whether this conservative approach could have a negative impact on a firm’s ability.
3.
Explanation of Solution
Under 12%:
Year | Cash flow | Discount factor @ 12% | Cash flow |
(a) | (b) | ||
0 | $(340,000) | 1.000 | $(340,000) |
1 | $80,000 | 0.893 | $71,440 |
2 | $80,000 | 0.797 | $63,760 |
3 | $80,000 | 0.712 | $56,960 |
4 | $80,000 | 0.636 | $50,880 |
5 | $80,000 | 0.567 | $45,360 |
6 | $80,000 | 0.507 | $40,560 |
7 | $80,000 | 0.452 | $36,160 |
8 | $80,000 | 0.404 | $32,320 |
9 | $80,000 | 0.361 | $28,880 |
10 | $80,000 | 0.322 | $25,760 |
Net present value | $112,000 |
Table (9)
Under 20%:
Year | Cash flow | Discount factor @ 20% | Cash flow |
(a) | (b) | ||
0 | $(340,000) | 1.000 | $(340,000) |
1 | $80,000 | 0.833 | $66,640 |
2 | $80,000 | 0.694 | $55,520 |
3 | $80,000 | 0.579 | $46,320 |
4 | $80,000 | 0.482 | $38,560 |
5 | $80,000 | 0.402 | $32,160 |
6 | $80,000 | 0.335 | $26,800 |
7 | $80,000 | 0.279 | $22,320 |
8 | $80,000 | 0.233 | $18,640 |
9 | $80,000 | 0.194 | $15,440 |
10 | $80,000 | 0.162 | $12,960 |
Net present value | $(4,640) |
Table (10)
From the above calculation it is clear that the company would not acquire the robotic system, if it uses 20% discount rate.
In this case, using an excessive discount rate could damage the ability of the firm to stay competitive. Because the usage of excessive discount rate may lead a firm to reject new technology (which would increase the quality and productivity). Whereas, the other firms would invest in the new technology, as a result their products will be priced lower and would have a higher quality. Thus, these features would probable cause severe difficulty for the more conservative firm.
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Chapter 19 Solutions
Cornerstones of Cost Management (Cornerstones Series)
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