The time has come to evaluate (cost justify) a new piece of equipment for our production line. Your mission is to determine whether or not to purchase replacement equipment based upon the numbers given below.
Existing Equipment:
• Depreciation Cost Per Year = -0- (fully depreciated)
• Maintenance Cost = $13,000 per year
• Operator Labor = 2 people per shift, $13.50 per hour, 2080 hours worked per person, 2 shifts of operation @ 8 hours each
• Grand Total Overtime Hours = 333 per year
• Employee Benefits = 40% of all wages
• NRG Consumption = $73 per operating day
Note: Overtime hours are paid at a rate of 150% of regular pay for hours over 8 per shift.
Proposed Equipment:
• Depreciation Cost Per Year of Proposed Equipment = Purchase price of $240,000; economic life of 8 years
• Maintenance Cost = $6,000 per year
• Operator Labor = 1 person per shift, $13.50 per hour, 2080 hours worked per person, 2 shifts of operation @ 8 hours each
• Grand Total Overtime Hours = -0-
• Employee benefits = 40% of all wages
• NRG Consumption = $21 per operating day
Answer the following:
1. What is the total cost difference, per year, for operating the replacement equipment versus the existing equipment?
2. Should we replace our existing equipment? Why or why not?
3. What is the simple, annual % rate of return on the $240,000 investment required for the replacement equipment?