Case Study: Alexander & Sons Alexander & Sons Company is currently considering the purchase of equipment that...

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Case Study: Alexander & Sons
Alexander & Sons Company is currently considering thepurchase of equipment that produces mugs.
The equipment needed would cost $3 million, with a disposalvalue of $400,000.
The equipment would be able to produce 55 million mugs over its5-year life.
The company has estimated that approximately 11 million mugswould be sold for each of the next 5 years, at the followingprices:
$1.00 for year 1 and 2
$1.20 for year 3 and 4
$1.25 for year 5
The company would hire seven new employees.
These seven individuals would be full-time employees.
Each will work 2,000 hours per year and earn:
$31 per hour in the first 3 years.
$32 per hour in year 4 and 5.
All employees would also receive annual benefits making up 20percent of wages, in addition to an annual $10,000 cost for healthbenefits for each employee.
It is estimated that:
The raw materials needed will cost 0.50 per mug.
Other variable costs would be 0.20 per mug.
No additional fixed costs would be incurred if this project isaccepted.
The company's discount rate is 10 percent, and the current taxrate of 35 percent is anticipated to remain unchanged. The companyuses the straight-line method for depreciation.

Case Study Questions
Based on the above information, calculate the followingitems:
Annual net cash flows over the expected life of theequipment
Payback period
Net present value
The accounting rate of return

Answer & Explanation Solved by verified expert

3.6 Ratings (479 Votes)

The annual net cash flows are calculated as below employee benefits in each year employee wages 20 10000depreciation per year equipment cost 5net cash from sale of equipment sale price 1 tax rate See Answer

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Case Study: Alexander & SonsAlexander & Sons Company is currently considering thepurchase of equipment that produces mugs.The equipment needed would cost $3 million, with a disposalvalue of $400,000.The equipment would be able to produce 55 million mugs over its5-year life.The company has estimated that approximately 11 million mugswould be sold for each of the next 5 years, at the followingprices:$1.00 for year 1 and 2$1.20 for year 3 and 4$1.25 for year 5The company would hire seven new employees.These seven individuals would be full-time employees.Each will work 2,000 hours per year and earn:$31 per hour in the first 3 years.$32 per hour in year 4 and 5.All employees would also receive annual benefits making up 20percent of wages, in addition to an annual $10,000 cost for healthbenefits for each employee.It is estimated that:The raw materials needed will cost 0.50 per mug.Other variable costs would be 0.20 per mug.No additional fixed costs would be incurred if this project isaccepted.The company's discount rate is 10 percent, and the current taxrate of 35 percent is anticipated to remain unchanged. The companyuses the straight-line method for depreciation.Case Study QuestionsBased on the above information, calculate the followingitems:Annual net cash flows over the expected life of theequipmentPayback periodNet present valueThe accounting rate of return