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  • 1 Manufacturing Units Cost Saving Versus Unit Purchase Cost

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    Punkruk Mcent
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    This document analyzes the costs and benefits of manufacturing units versus purchasing them. It estimates that manufacturing would save $7 per unit over 5 years. It calculates the net present value of manufacturing as $47,360.83 based on an estimated $956,600 initial investment offset by tax benefits, savings, and salvage value. The payback period is estimated between 3 to 4 years, as the cumulative after-tax cash flows surpass the initial investment within that timeframe.

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    02411750014041_Problem 16.60

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    This document analyzes the costs and benefits of manufacturing units versus purchasing them. It estimates that manufacturing would save $7 per unit over 5 years. It calculates the net present value of manufacturing as $47,360.83 based on an estimated $956,600 initial investment offset by tax benefits, savings, and salvage value. The payback period is estimated between 3 to 4 years, as the cumulative after-tax cash flows surpass the initial investment within that timeframe.

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    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
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    16 views5 pages

    1 Manufacturing Units Cost Saving Versus Unit Purchase Cost

    Uploaded by

    Punkruk Mcent
    This document analyzes the costs and benefits of manufacturing units versus purchasing them. It estimates that manufacturing would save $7 per unit over 5 years. It calculates the net present value of manufacturing as $47,360.83 based on an estimated $956,600 initial investment offset by tax benefits, savings, and salvage value. The payback period is estimated between 3 to 4 years, as the cumulative after-tax cash flows surpass the initial investment within that timeframe.

    Copyright:

    © All Rights Reserved
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    of 5

    1 Manufacturing units cost saving versus unit purchase cost:

    unit cost
    New unit variable manufacturing cost
    material $ 8.00 x
    direct labor $ 10.00 x
    variabel overhead $ 6.00 x
    saving per unit

    Manufacturing saving
    Year
    Unit Saving Estimated Production Estim Cost (1-Tax Rate)

    20x1 $7.00 50000 $350,000.00 0.6


    20x2 $7.00 50000 $350,000.00 0.6
    20x3 $7.00 52000 $364,000.00 0.6
    20x4 $7.00 55000 $385,000.00 0.6
    20x5 $7.00 55000 $385,000.00 0.6

    MACRS depreciation
    cost $ 945,000.00
    discount 2% $ (18,900.00)
    the freight $ 11,000.00
    installation $ 22,900.00 +
    Net installed cost $ 960,000.00

    Year Net Installed cost MACRS rate (table) Depreciation Tax Rate
    20x1 $ 960,000.00 0.3333 $ 319,968.00 0.4
    20x2 $ 960,000.00 0.4445 $ 426,720.00 0.4
    20x3 $ 960,000.00 0.1481 $ 142,176.00 0.4
    20x4 $ 960,000.00 0.0741 $ 71,136.00 0.4

    20x0 20x1
    The new equipment (price) $ (945,000.00)
    Discount 2% $ 18,900.00
    The freight $ (11,000.00)
    Installation cost $ (22,900.00)
    Savage value-old equipment $ 900.00
    Working capital reduction $ 2,500.00
    Manufacturing savings $ 210,000.00
    Supervision $ (27,000.00)
    Depreciation tax shield $ 127,987.20
    Salvage value-new equipment
    After-tax cash flow $ (956,600.00) $ 310,987.20
    Disc rate 1 0.893
    Present value $ (956,600.00) $ 277,711.57
    Net present value $ 47,360.83

    3 Year Year
    20x1 $ 310,987.20 20x4 $ 232,454.40
    20x2 $ 353,688.00 $ 912,945.60
    20x3 $ 248,270.40 total $ 1,145,400.00
    total $ 912,945.60

    $ 912,945.60 < $ 956,600.00 < $ 1,145,400.00


    so, the payback period is between 3 and 4 years
    $ 27.00

    1 = $ 8.00
    75% = $ 7.50
    75% = $ 4.50 $ 20.00 -
    $ 7.00

    After-Tax Cost
    Savings

    $ 210,000.00
    $ 210,000.00
    $ 218,400.00
    $ 231,000.00
    $ 231,000.00
    Tax Benefit
    $ 127,987.20
    $ 170,688.00
    $ 56,870.40
    $ 28,454.40

    20x2 20x3 20x4 20x5

    $ 210,000.00 $ 218,400.00 $ 231,000.00 $ 231,000.00


    $ (27,000.00) $ (27,000.00) $ (27,000.00) $ (27,000.00)
    $ 170,688.00 $ 56,870.40 $ 28,454.40 -
    $ 7,200.00 +
    $ 353,688.00 $ 248,270.40 $ 232,454.40 $ 211,200.00
    0.797 0.712 0.636 0.567 x
    $ 281,889.34 $ 176,768.52 $ 147,841.00 $ 119,750.40

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