Question

Splenda specializes in making S'mores cakes. The cost of making the S' mores is as mentioned in the table. Recently Splenda has been facing a lot of problems with the oven as some of its chocolate chips are not sticking to the cracker and hence they have to scrap them. This accounts for 10% of the S'mores actually made. A vendor feels that the installation of a new oven which has just been introduced in the market is the solution to this problem. He says that the installation of this oven with temperature sensors that would have an onetime cost of $90,000 in year 0 will completely reduce the loss due to the defective items. Splenda operates 40 hours a week for 48 weeks a year. It can sell a box of S'mores for $15. Assuming Splenda can sell all the cakes it makes which option would you recommend for a 10-year life to Splenda if the cost of capital for Splenda is 6%.

	Cost
Material Cost per box	$1.93
Labor cost (2 operators @ 15 per hour)	$30
Electricity ($/hr)	$1.20

Current set-up:

It takes 1 hour to make 32 S' mores

8 smores in a box

Maintenance of $3,000 is incurred per year and this increases by 250 every year

Number of boxes per hour is 4

New set up:

It takes 1 hour to make 32 S'mores

8 smores in a box

Maintenance of $1,800 is incurred per year. This increases by 2% every year

Number of boxes per hour is 4

Please only attempt if you are 100% sure about the answer. Show all step. Do not copy from chegg.

a. AEW of current?

b. AEW of New?

c. Which option to be selected?

Answer 1

Selling price	15
Box per hour	4
Revenue per hour	60

Hours per week	40
Weeks per year	48
Total hours per year	1920

Revenue per year

115200

10% are scrapped currently

Revenue (current)	103680
Revenue (new)	115200

These will be EABs as well

Total material cost per hour	7.72
Labor cost per hour	30
Electricity cost per hour	1.2
Total Opex per hour	38.92

Maintainence (new)	1800		Increment	2%
Maintainence (current)	3000		Increment	250

Opex per year = 38.92*1920 + maintainence = 74726.4 + maintainence

Considering life of 10 years

For Current
Year	1	2	3	4	5	6	7	8	9	10
Opex	74726.4	74726.4	74726.4	74726.4	74726.4	74726.4	74726.4	74726.4	74726.4	74726.4
Maintainence	3000	3250	3500	3750	4000	4250	4500	4750	5000	5250
Total Opex	77726.4	77976.4	78226.4	78476.4	78726.4	78976.4	79226.4	79476.4	79726.4	79976.4
Total PV of expenses	5,79,474
EAC (current)		78,732
For New
Year	1	2	3	4	5	6	7	8	9	10
Opex	74726.4	74726.4	74726.4	74726.4	74726.4	74726.4	74726.4	74726.4	74726.4	74726.4
Maintainence	1800.0	1836.0	1872.7	1910.2	1948.4	1987.3	2027.1	2067.6	2109.0	2151.2
Total Opex	76527.4	76564.4	76602.1	76640.6	76679.8	76719.7	76760.5	76802.0	76844.4	76887.6
Total PV of expenses	5,64,399
EAC (new)		76,684

EAW = EAB - EAC

For Current

EAW =  103680 - 78,732 = 24948

For New

EAW = 115200 - 76,684 = 38516

For calculation of PV, NPV function is used in Excel, and from that PV, pmt function is used to calculate EAC.

EAW for new is higher than EAW for current by 38516 - 24948 = 13568

Year	1	2	3	4	5	6	7	8	9	10
EAB(new) - EAB(current)	13568	13568	13568	13568	13568	13568	13568	13568	13568	13568
Total PV of the benefit of installation of new oven	99,862
As it is higher than 90000, this should be done.