a) An increased number of manufacturing companies are investing in advanced manufacturing systems. Two major benefits...

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Accounting

a) An increased number of manufacturing companies are investingin advanced manufacturing systems. Two major benefits of thesesystems are greater flexibility in the manufacturing process andimprovements in product quality. Briefly explain how these benefitscreate problems when performing discounted cash flow analysis.
b) A division manager prepared a proposal for a capital project.The project was evaluated using capital budgeting techniques andeventually the firm decided not to fund and pursue the project. Themanager observed, “The Company’s post-audit process will show thatthis project should have been funded.” Comment on the manager’sunderstanding of the post-audit process.
c) Bestie Corporation is considering the acquisition of a newmachine that costs $350,000. The machine is expected to have a4-year service life and will produce annual savings in cashoperating costs of $100,000. Bestie uses the straight-line methodof depreciation and depreciates the asset as follows – ½ yeardepreciation in Year 1, full year depreciation in Years 2 to 4(inclusive), and ½ year depreciation in Year 5. The company issubject to a 30% tax rate, has an after-tax hurdle rate of 12% androunds calculations to the nearest dollar. Calculate the machine’sNet Present Value. Is the machine is an attractive investment? Why?

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4.4 Ratings (585 Votes)

Question 1 :

Estimating Future Revenues may not accurate.

Stock Evaluation or closing stock will consider for DCF

Question No 2: Leasing Vs Procurement

Funding or Procuring will depends on the following Aspects: Type of Lease, NPV and Payback period for Investment and IRR. If NPV is more Positive then we can opt for that

Question No:3

Details	Year 1	Year 2	Year 3	Year 4	Year 5	Total

Reveune	1,00,000	1,00,000	1,00,000	1,00,000	1,00,000	5,00,000
Tax @	30%	30%	30%	30%	30%
	70,000	70,000	70,000	70,000	70,000	3,50,000
Depreciation	43,750	87,500	87,500	87,500	43,750	3,50,000

PAT	26,250	-17,500	-17,500	-17,500	26,250	-

12%	0.893	0.797	0.712	0.636	0.567
NPV	23,438	-13,951	-12,456	-11,122	14,895	804

NPV is positive, hence benifte to the Assessee

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