# TPM Harvard Case Solution & Analysis

## TPM Case Solution

Should TPM upgrade to the new technology or continue to operate using its current equipment

The net present values of the new equipment that would be purchased by the company have been calculated as well as the net present value of the current equipment being used by the company has been calculated.

Furthermore, both the new and old equipment had different functions, hence the annualized equivalent cost was determined by calculating the annuity factor of the machine using thecost of capital which was12% and by dividing the annuity factor by the net present value calculated of each equipment with their respective annuity factors.

Therefore, the annual annualized cost would be determined.

 Comparison Current Equipment Net Present value 5,434,181 Annualized equivalent cost 1,789,119 New Equipment Net Present value 2,874,146 Annualized equivalent cost 797,316

After analyzing the net present value and annualized equivalent cost of both equipment, it is recommended to the company if the project is mutually exclusive then it should continue its operations with the current equipment as the net present value as well as the annualized equivalent cost are higher than the NPV and Annualized equivalent of new equipment. Hence, it is more beneficial to the company if it continues to use its current equipment for the four remaining years in its life because, in the end, the equipment would provide total benefit amounted to \$5,434,181. On the other hand,if the company decides to sell the current equipment and acquire the new equipment, then the company would potentially lose \$2,560,035 at the end of the life of the new equipment, as we know that the net present value of the new equipment is \$2,874,146.

The net present value for new equipment is calculated.The new equipment had five years of useful life with salvage value at the end of its life amounted to \$15,000,000. The initial investment that the company would have to bear to acquire the machine amounted to \$75,000,000 adding the amount of net working capital, which would be reduced if the company decides to acquire the new machine amounting \$12000000 and subtracting \$11,000,000, which would be received by the company from selling the old machine.

Hence,the total capital investment required for the project before the machine would be ready for production, which would amount \$76,000,000.

The new machine is expected to generate 600,000 of product annually at the price of \$124/unit hence, the total revenue generated by the machine annually would amount to \$74,400,000 and subtracting this total with the variable cost of production amounted to \$36,120,000 whereas, the fixed cost amounted to \$3,780,000 annually.The gross profit was derived by the new machine as the new machine was acquired through loan where an interest of 9% was charged on its income.Similarly, corporate tax of 30% would also be charged on its income and subtracting the interest and tax from the income would provide the net cash flow of the machine.

By multiplying these net cash flows with the discounting factors, we get the present value of the machine after adding the total of present values over five years and by subtracting this amount with \$76,000,000, which is the total capital investment calculated earlier, we obtained the net present value of the new machine which amounted to \$2,874,146.

The net present value of current machine was also calculated similarly other than facts that the current machine had no salvage value at the end of its life, and its book value currently amounted to \$28,000,000 and the current machine produced 500,000 units annually at 124/unit amounting to \$62,000,000 whereas its fixed cost amounted to \$4,150,000,and the variable cost amounted to \$42,125,000, which resulted in \$15,725,000 as its gross income. Furthermore, the current machinery was not acquired on any loans, hence the 9% interest rate would not be charged on this machine whereas, it would be liable to pay 30% corporate tax........................

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