Short answer B03 final:

Question 2
Winox Inc. is considering replacing its machine acquired 4 years ago at a cost
of $135000. This machine is still in good condition but management wants
more flexibility and lower manufacturing costs. The actual current market
value of the machine is $82000, with a salvage value of $15000 in 6 years.
A manufacturer is offering a new machine at a price of $168000. The
machine would last 6 years and has an expected salvage value of $24000.
The new machine will release $9000 in working capital, which will be required
at the end of the 6th year. With the new machine, management estimates
important changes in the manufacturing costs in every quarter:
Quarterly Expenses
Old Machine
New Machine
Direct labour
$46800
$42280
Direct material
23260
20450
Repairs & Maintenance
4250
6470
Receiving &handling
3420
2150
Testing & inspection
4280
5560
Amortization
3000
6000
Total Expenses
$85010
$82910
Quarterly production (in 500000
500000
units)
Winox has a minimum desired nominal annual rate of 16% with quarterly
compounding, and a cutoff period of 3 years in evaluating the new project.
Required:
1. Calculate the new present value.
2. Calculate the point of indifference in terms of quarterly cost savings.
3. Determine the payback period in years.
4. Calculate the quarterly accrual accounting rate of return.
5. Determine the quarterly Internal Rate of Return (IRR) to 2 decimal
points.
6. Based on your calculations above, state your conclusion on whether
the new machine should be purchased. Please briefly comment; in
point form, on (1) quantitative measures based on each of the four
financial measures, and (2) two qualitative issues.

Question 3
Muse Co. manufactures three different models of electronic pianos Rocco,
Decca, and Xenon. Data on the three models is presented below:
Rocco
Decca
Xenon
Selling price
$520
$630
$780
Unit variable cost
$325
$410
$510
Production units in 2009
4200
4100
3800
Estimated unit sales in 2009
4800
4500
4400
Machine-hours per unit
6
8
7
Avoidable fixed costs, if product line is
$42600
$38500
$40400
eliminated
Total fixed costs are $425000 per year; production capacity is 80000
machine-hours per year. Muses income tax is 30%.
Muse is currently facing two business opportunities:
Opportunity #1:
Alexor Inc. approached Muse with the option to license the Decca model for a
fee of $62000 plus $210 per unit sold. Under the license agreement, Muse
will not produce and sell the Decca model to compete with Alexor. Alexors
total estimated sales of Decca model are expected to be 4250 units per year.
Opportunity #2:
Windsor Co. has offered to purchase 4100 units of a simpler version of Xenon
for $680. Muse estimates that this version of the Xenon would result in
variable costs of $500 per unit to manufacture and 7 machine hours per unit,
but an additional fixed cost of $432000 for a new assembly machine. The
order has to be either taken in full or rejected totally.
Required:
1. Compute the contribution margin per machine-hour of each model and
rank the order of priority for the models to be produced. Comment on
which model should be reduced and by how many units in the
production schedule.
2. Should Muse enter in to the license agreement with Alexor for its
Decca model? What is the net benefit or cost for accepting the license
agreement?
3. Assuming that the Decca model is licensed to Alexor, should Muse
accept the order from Windsor? What is the incremental operating
income/loss for accepting this order? What is the break-even in units
for accepting this order, if Muse can accept any quantity?

4. What is Muses EVA from taking the special order in (3), if it borrows
$172800 from the Nonon Bank at 10% and raises the rest of the money
for the assembly machine from shareholders at 12%?