Question

In: Economics

"Motors R Us requires a specific painting process for one its automobiles that will be manufactured...

"Motors R Us requires a specific painting process for one its automobiles that will be manufactured for exactly eight years. Three options are available. Neither option 2 nor option 3 can be repeated after its process life. However option 1 will always be available at the same cost during the period of eight years. Here are the options:
-Option 1 is to subcontract out the process at a cost of $134,000 per year.
-Option 2 costs $194,000 immediately and has annual operating and labor costs of $81,000 and a useful service life of eight years with a salvage value of $43,000.
-Option 3 costs $147,000 immediately and has annual operating and labor costs of $71,000 and a useful service life of five years with a salvage value of $21,000. For years six through eight, the firm will follow option 1.
Enter the ""net present cost"" for the option that you would recommend if i = 16%. Enter your answer as positive number."

Solutions

Expert Solution

OPTION-1
YEAR PAYMENT PVF @16% PRESENT VALUE
1 134000 0.862 115517.2
2 134000 0.743 99583.83
3 134000 0.641 85848.13
4 134000 0.552 74007.01
5 134000 0.476 63799.14
6 134000 0.410 54999.26
7 134000 0.354 47413.16
8 134000 0.305 40873.41
Total present value of cost 582041.2
OPTION-2
YEAR PAYMENT PVF @16% PRESENT VALUE
0 194000 1.000 194000
1 81000 0.862 69827.59
2 81000 0.743 60196.2
3 81000 0.641 51893.27
4 81000 0.552 44735.58
5 81000 0.476 38565.15
6 81000 0.410 33245.82
7 81000 0.354 28660.19
8 38000 0.305 11590.97
Total present value of cost 532715
OPTION-3
YEAR PAYMENT PVF @16% PRESENT VALUE
0 147000 1.000 147000
1 71000 0.862 61206.9
2 71000 0.743 52764.57
3 71000 0.641 45486.69
4 71000 0.552 39212.67
5 50000 0.476 23805.65
6 134000 0.410 54999.26
7 134000 0.354 47413.16
8 134000 0.305 40873.41
Total present value of cost 512762

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