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The factory capacity is 25,000 units per year, but demand is 40,000 units. You have an...

The factory capacity is 25,000 units per year, but demand is 40,000 units. You have an opportunity to buy equipment that will allow your company to meet the 40,000 unit annual demand. The equipment will only last 7 years and have no use or no value after that. The equipment costs $4,567,890 - plus 8.88% sales tax, 1.2% dealer fee, and $13,917 for title and license fees. The company will pay the equipment off interest free over the next 5 years. Annual payments will be equal and will include all taxes and fees. The current sales price is $199/unit and variable cost is $125/unit. The variable cost per unit will go down to $95/unit with the new equipment. The fixed costs of $960,000 per year will rise $300,000 with the cost of the new equipment. The contribution margin will increase $2 per year faster with the new equipment as compared with the old. Your cost of capital/investment threshold is 7.17%.

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Expert Solution

CALCULATION OF TOTAL COST OF EQUIPMENT-

COST OF EQUIPMENT $4567890
ADD:- SALES TAX ( 4567890*.0888) 405629
ADD:- DEALER FEES ( 4567890*.012) 54814
ADD :- LICENCE FEES 13917
TOTAL COST OF EQUIPMENT $5042250

CALCULATION OF EQUAL ANNUAL INTEREST FREE PAYMENT

5042250/5= $1008450

CALCULATION OF OUTFLOW AND INFLOW

YEAR 1 2 3 4 5
EQUAL ANNUAL PAYMENT -1008450 -1008450 -1008450 -1008450 -1008450
INCREASE IN FIXED COST -300000 -300000 -300000 -300000 -300000

DEPRECIATION FOR 7 YEARS LIFE

(5042250/7)

 -720322 -720322 -720322 -720322 -720322
TOTAL OUTFLOW -2028772 -2028772 -2028772 -2028772 -2028772

INCREASE IN CONTRIBUTION MARGIN

{(199-95)*40000}-{(199-125)*25000}

 2310000 2310000 2310000 2310000 2310000
INCREASE IN MARGIN BY 2 PER YEAR 80000 160000 240000 320000
TOTAL INFLOW 2310000 2390000 2470000 2550000 2630000
NET FLOW 281228 361228 441228 521228 601228
COST OF CAPITAL @7.17% 0.933 0.871 0.812 0.758 0.707
NET SAVING $262413.0 $314510.4 $358462.2 $395090.8 $425248.6

TOTAL SAVING AFTER BUYING THE EQUIPMENT WILL BE $1755725

SO THIS PROJECT WILL BE VIABLE

ekkarill92 answered 2 years ago
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