Question

1. Draw a 5-year cash flow diagram representing the following cash flows to build springs: (Chapter 2)

Initial investment in plant and equipment $30K

Annual maintenance: $5K after year 1 and increasing $1K per year after that

Annual production costs – $10K/year

Annual revenue - $50K/year

2. A company plans to design and build transport vehicles for the Marine Corps. The cost for the design is $15M. The cost for the test prototype is $3M. The cost to produce and test each production vehicle is $1M. What is the non-recurring cost? What is the recurring cost per vehicle? What price per vehicle must the company sell the vehicles to the government to make $100K profit per vehicle if the company sold 50 vehicles? 100 vehicles? Why does the price per vehicle go down when production goes up?

Answer 1

a) Cash flow diagram

b) Plse see table below. Sellign price per vehicle comes down as more numbers are produced since the fixed (non-recurring) costs get distributed over a bigger number.

Nature of Cost	Description	$M
Non-recurring Cost	Design Cost	15
Non-recurring Cost	Test Prototype	3
Recurring Cost per Vehicle	Production / vehicle	1
Variable Cost	Production cost for 50 vehicles	50
Variable Cost	Production cost for 100 vehicles	100
Total Cost	For 50 vehicles	68
Profit required	100K x 50	5
Selling price	for 50 vehicles	73
Selling price	Per vehicle	1.46
Total Cost	for 100 vehicles	118
Profit required	100K x 100	10
Selling price	for 100 vehicles	128
Selling price	Per vehicle	1.28