Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 37

Compensation; Net Present Value Choco-Lots Candy Co. makes chewy chocolate candies at a plant in Winston-Salem, North Carolina. Brian Main, the production manager at this facility, installed a packaging machine last year at a cost of $400,000. This machine is expected to last for 10 more years with no residual value. Operating costs for the projected levels of production are $80,000 annually.

Brian has just learned of a new packaging machine that would work much more efficiently in Choco-Lots’ production line. This machine would cost $420,000 installed, but the annual operating costs would be only $30,000. This machine would be depreciated over 10 years with no residual value. He could sell the current packaging machine this year for $150,000.

Brian has worked for Choco-Lots for seven years. He plans to remain with the firm for about two more years, when he expects to become a vice president of operations at his father-in-law’s company. Choco-Lots pays Brian a fixed salary with an annual bonus of 1 percent of net income for the year.

Assume that Choco-Lots uses straight-line depreciation and has a 10 percent required rate of return. Ignore income tax effects.

Required

1. As the owner of Choco-Lots, would you want Brian to keep the current machine or purchase the new one?

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2. Why might Brian not prefer to make the decision that the owner of Choco-Lots desires?

Step 1 of 4

Business Analysis:

Business analysis means analysing the financial and non-financial information of an entity. Focus is placed on analysis of financial information through analysis of balance sheet, income statement, cash flow statement and analysis of financial ratios of the company. These ratios are analysed by comparing the result of these ratios with the industry standards..