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In 2 x 4 and 2 x 6 lumber production, significant amounts of wood are present in Building 47.200 sideboards produced after the initial cutting of...
(a) Should the defender be replaced now if the mill's MARR and marginal tax rate ar 15% and 40%, respectively?
(b) If the defender will eventually be replaced by the current challenger, when is the optimal time to replace?In 2 x 4 and 2 x 6 lumber production, significant amounts of wood are present inBuilding47.200sideboards produced after the initial cutting of logs. Instead of processing theConveyor modification14.500sideboards into wood chips for the paper mill, an "edger" is used to reclaim additionalElectrical (wiring)16.500lumber, thus resulting in savings for the company. An edger is capable of reclaimingSub total$135,400lumber by any of the following three methods (1) removing rough edges, (2)Engineering7,000splitting large sideboards, and (3) salvaging 2 x 4 lumber from low-quality 4 x 4Construction management20,000boards. Union Camp Company's engineers have discovered that a significantContingency16.200reduction in production costs could be achieved simply by replacing the originalTota$178,600"edger" machine with a newer laser-controlled model.Ugeful life of new edger10 yearsSalvage valueOld Edger: The old edger was placed in service 12 years ago and is fullyBuilding (tear down)depreciated. Any machine scrap value would offset the removal cost of theEquipment10% of theequipment. No market exists for this obsolete equipment. The old edger needs twooriginal costoperators. During the cutting operation, the operator makes edger settings based onAnnual ORM costs$35,000his/her own judgment. The operator has no means of determining exactly whatDepreciation Methodsdimension of lumber could be recovered from a given sideboard and must guess at theBuilding19-yearproper setting to recover the highest grade of lumber. Furthermore, the old edger isMACRSnot capable of salvaging good-quality 2 x 4s from poor-quality 4 x 49. The defenderEquipment and7-yearmstallationMACRScan continue in service for another 3 years with proper maintenance.Current market valueTwenty-five percent of total mill volume passed through the edger. A 12% yieldCurrent book valueimprovement is expected to be realized on this production, which will result in anAmmual maintenance$2,500 in year 1,improvement of total mill volume of (0 25)0.12)=3%, or an annual savings ofpostincreasing at a$57,895.rate of 159% eachyear over the(a) Should the defender be replaced now if the mill's MARR and marginal tax rateprevious year'sar 15% and 40%, respectively?coeAmmual operating costs(b) If the defender will eventually be replaced by the current challenger, when is(labor and power$65,000the optimal time to replace?New Laser-Controlled Edger: The new edger has numerous advantages over itsdefender. There advantages include laser beams that indicate where cuts should bemade to obtain the maximum yield by the edger. The new edger requires a singleoperator, and labor savings will be reflected in lower operating and maintenance costsof $35,000 a year.Estimated CostEquipment$35,700Equipment Installation21.500