(Ignore income taxes in this problem.) A newly developed device is being conside

Question

(Ignore income taxes in this problem.) A newly developed device is being considered by Fairway Foods for use in processing and canning peaches. The device, which is available only on a royalty basis, is reported to be a great labor saver. Fairway's production manager has gathered the following data:

Present   Labor Proposed   Royalty Method Method Per year         Labor cost $ 55,000 $ 7,000         Royalty cost $ 24,000 Initial   start up costs associated with the new device $ 200,000 The new   device must be ontained through a licensing arrangement with the developer.   The license period lasts for   only 8 years. Fairway Food's require rate of return is 10%. Required: a. By use of   the incremental cost approach, compute the net present value of the proposed   licensing of the new   device. (negative amount should be indicated by a minus sign. Round "PV   factor" to 3 decimal   places. Round your other intermedate calculations and final answers to the   nearest whole   dollar. ) (use exhibit 11b-2) Net   present value $

Explanation / Answer

Hi,

Please find the answer as follows:

NPV = - 200000 - 31000/(1+.10)^1 - 31000/(1+.10)^2 - 31000/(1+.10)^3 - 31000/(1+.10)^4 - 31000/(1+.10)^5 - 31000/(1+.10)^6 - 31000/(1+.10)^7 - 31000/(1+.10)^8 = -365382.71 or -365383

Thanks.

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