Question

Identifying cash flows (LO 1) Mighty Vita produces a wide range of herbal supplements sold nationwide through independent distributors. In response to an increasing demand for its products, the company is considering the purchase of a new packaging machine to replace the seven-year-old machine currently in use. The new machine will cost $160,000, and installation will require an additional $15,000. The machine has a useful life of 10 years and is expected to have a salvage value of $8,000 at that time. The variable cost to operate the new machine is $10 per carton compared to the current machine's variable cost of $10.10 per carton, and Mighty Vita expects to pack 250,000 cartons each year. If the new machine is purchased, Mighty Vita will avoid a required $11,050 overhaul of the current machine in three years. The current machine has a market value of $12,850. Identify the amount and timing of all cash flows related to the acquisition of the new packaging machine. Cash Flow Timing Amount Purchase price $ Installation Salvage of old equipment Salvage of new equipment Variable cost savings Avoided overhaul

Answer 1

Mighty Vita

Cashflow and timing

Year 0. Machine cost = -$160,000 (outflow)

Year 0. Set up costs = -$15,000 (outflow)

Year 0. Salvage of Old equipment = $12,850 (inflow)

Year 3. Savings on Overhaul of old machine = $11,050 (inflow)

Year 1 - 10. Variable Costs Savings = ($0.10 x 250,000) = $25,000 (inflow)

Year 10. Salvage value = $8,000 (inflow)