FARA LAYNDS LAMBORGHINI - 0910233039

PROBLEM 13-31

Old operating system:

Year
0
1--0
NPV

Cash Flow
###

df Present Value
1.000
5.650 (1,113,050)
(1,113,050)

Flexible system (using MACRS depreciation):

Year
0
1
2
3
4
5
6
7
8
9
10
NPV

(1-t)C
(62,700)
(62,700)
(62,700)
(62,700)
(62,700)
(62,700)
(62,700)
(62,700)
(62,700)
(62,700)

tNC
60,733
104,083
74,333
53,083
37,953
37,910
37,953
18,955
-

Cash Flow
(1,250,000)
(1,967)
41,383
11,633
(9,617)
(24,748)
(24,790)
(24,748)
(43,745)
(62,700)
(62,700)

df Present Value
1.000 (1,250,000)
0.893
(1,757)
0.797
32,982
0.712
8,282
0.636
(6,117)
0.567
(14,032)
0.507
(12,569)
0.452
(11,186)
0.404
(17,673)
0.361
(22,635)
0.322
(20,189)
(1,314,893)

Old operating system (with adjustment for inflation):

Year
0
1
2
3
4
5
6
7
8
9
10
NPV

Cash Flow
(206,240)
(215,850)
(225,844)
(236,237)
(247,047)
(258,289)
(269,980)
(282,139)
(294,785)
(307,936)

df Present Value
1.000
0.893 (184,172)
0.797 (172,032)
0.712 (160,801)
0.636 (150,247)
0.567 (140,076)
0.507 (130,952)
0.452 (122,031)
0.404 (113,984)
0.361 (106,417)
0.322
(99,156)
(1,379,868)

Flexible system (with adjustment for inflation):

Year

Cash Flow

df

Present Value

0
1
2
3
4
5
6
7
8
9
10
NPV

(1,250,000)
(4,475)
36,266
3,804
(20,268)
(38,332)
(41,426)
(44,556)
(66,854)
(89,242)
(92,811)

1.000 (1,250,000)
0.893
(3,996)
0.797
28,904
0.712
2,708
0.636
(12,890)
0.567
(21,734)
0.507
(21,003)
0.452
(20,140)
0.404
(27,009)
0.361
(32,216)
0.322
(29,885)
(1,387,261)

It is very important to adjust cash flows for inflationary effects. Since the
required rate of return for capital budgeting analysis reflects an inflationary
component at the time NPV analysis is performed, a correct analysis also
requires that the predicted operating cash flows be adjusted to reflect
inflationary effects. If the operating cash flows are not adjusted, then an
erroneous decision may be the outcome. Notice, for example, that after
adjusting for inflation, there is virtually no difference between the two
systems-and given the intangibles associated with the flexible system, it
would likely be chosen.

PROBLEM 14-24

A
Component 12-L (1,000 units)
Test hours
Machine hours
Component 14-M (800 units)
Test hours
Machine hours
Component 40-S (2,000 units)
Test hours
Machine hours
Total test hours
Total machine hours

Department
B

2,000
1,000

3,000
1,000

3,000
2,000

800
800

1,600
800

4,000
4,000
6,800
5,800

4,000
4,000
8,600
5,800

4,000
2,000
7,000
4,000

The demand can be met in all departments except for Department C. Production
requires 7,000 test hours in Department C, but only 5,500 hours are available.

Component 12-L:

CM per unit = $203 $110 = $93

CM per test hour = $93/3 = $31
Test hours needed (Dept. C): 3*1,000 = 3,000
Component 14-M:
CM per unit = $136 $86 = $50
Requires no hours in Department C
Component 40-S:
CM per unit = $184 $114 = $70
CM per test hour = $70/2 = $35
Test hours needed (Dept. C): 2*2,000 = 4,000

Production should be equal to demand for Component 40-S because it has the
highest contribution margin per unit of scarce resource. After meeting demand, any
additional labor hours in Department C should be used to produce Component 12-L
(5,500 4,000 = 1,500; 1,500/3 = 500 units of 12-L).

Contribution to profits:
Component 12-L:
Component 14-M:

46,500
40,000

Component 40-S:
Total contribution margin

140,000
226,500

Total
8,000
4,000
2,400
1,600
12,000
10,000
22,400
15,600

t C. Production
re available.

0 = $93
= $31

= $50
artment C
4 = $70
= $35

se it has the
eting demand, any
Component 12-L