Chapter 8, Problem 24QAP (4 Bookmarks) Show all steps: 0% Problem It is estimate

Question

Chapter 8, Problem 24QAP (4 Bookmarks) Show all steps: 0% Problem It is estimated that the annual sales of an energy saving device will be 20,000 the fust year and increase by 10,000 per year until 50,000 units are sold during the fourth year. Proposal A is to purchase manufacturing equipment costing $120,000with an estmated salvage value of anestmated $15.000 at the end of 4 years $15,000 at the end of 4 years. Proposal B is to purchase equipment costing $280,000 with an estimated salvage value of $32,000 at the end of 4 years. The variable manufacturing cost per unit under proposal A is estimated to be $8.00, but is estimated to be only $2.60 under proposal B. If the interest rate is 9%, which proposal should be accepted for a 4-year production horizon? Step-by-step solution There is no solution to this problem yet Get help from a Chegg subject expert Ask an expert

Explanation / Answer

proposal B should be accepted as the total cost is lower under this alternative.

**find present value factor from table at 9%

Proposal A Proposal B Year cash flow PVF 9% Present value of cash flow Cash Flow PVF 9% present value of cash flow [CF*PVF] 0 120000 1 120000   [120000*1] 280000 1 280000 1 20000*8=160000 .91743 146788.8 20000*2.6=52000 .91743 47706.36 2 30000*8=240000 .84168 202003.2 30000*2.6=78000 .84168 65651.04 3 40000*8=320000 .77218 246809.6 40000*2.6=104000 .77218 80306.72 4 50000*8=400000 .70843 283372 50000*2.6=130000 .70843 92095.9 4 -15000 salvage .70843 -10626.45 -32000 .70843 -22669.76 Total cost 988347.15 543090.26

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