(Ignore income taxes in this problem.) A newly developed device is being conside
ID: 2481161 • Letter: #
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:
115,000
The new device must be obtained through a licensing arrangement with the developer. The license period lasts for only 7 years. Fairway Foods' required rate of return is 11%.
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 intermediate calculations and final answers to the nearest whole dollar.) (Use Exhibit 11B-2)
Net Present value: ____
b.
Yes or No?
(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 labormethod Proposed royalty method Per year: Labor cost $ 42,000 $ 5,300 Royalty cost - $ 20,600 Initial startup costs associated with the new device - $
115,000
The new device must be obtained through a licensing arrangement with the developer. The license period lasts for only 7 years. Fairway Foods' required rate of return is 11%.
Explanation / Answer
a) Particulars Amount($) Total cost incurred by following current method 42000 Total cost incurred by using newly developed device 25900 Cost saving per year 16100 Calculate the present value of cost saving Cost saving per year * PV factor at 11% discountfor 1-7 years 16100*4.7121 75864.81 Compute Net present value Net Present value = Present value of cost saving - initial investment 75864.81-115000 -39135.19 b) No, As the Net Present value is negative the project should not be accpeted.
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