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Category > Accounting Posted 19 Aug 2017 My Price 13.00

Newmarge Products Inc

Problem 14-46 Postaudit, Sensitivity Analysis

Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new design will eliminate the production of a toxic solid residue. The initial cost of the system is estimated at $860,000 and includes computerized equipment, software, and installation. There is no expected salvage value. The new system has a useful life of 8 years and is projected to pro- duce cash operating savings of $225,000 per year over the old system (reducing labor costs and costs of processing and disposing of toxic waste). The cost of capital is 16%.

Required:

1.       Compute the NPV of the new system.

2.       One year after implementation, the internal audit staff noted the following about the new system: (1) the cost of acquiring the system was $60,000 more than expected due to higher installation costs, and (2) the annual cost savings were $20,000 less than expected because more labor cost was needed than anticipated. Using the changes in expected costs and bene- fits, compute the NPV as if this information had been available 1 year ago. Did the com- pany make the right decision?

3.       CONCEPTUAL CONNECTION Upon reporting the results mentioned in the postaudit, the marketing manager responded in a memo to the internal auditing department indicat- ing that revenues had increased by $60,000 per year because of increased purchases by environmentally sensitive customers. Describe the effect that this has on the analysis in Requirement 2.

4.       CONCEPTUAL CONNECTION Why is a postaudit beneficial to a firm?

Answers

Maurice Tutor
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Status NEW Posted 19 Aug 2017 03:08 PM My Price 13.00

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