A domestic producer of baby carriages, Pramble, buys the wheels from a company i

Question

A domestic producer of baby carriages, Pramble, buys the wheels from a company
in the north of England. Currently the wheels cost $4 each, but for a number of
reasons the price will double. In order to produce the wheels themselves, Pramble
would have to add to existing facilities at a cost of $800,000. It estimates that its unit
cost of production would be $3.50. At the current time, the company sells 10,000
carriages annually. (Assume that there are four wheels per carriage.)
a. At the current sales rate, how long would it take to pay back the investment
required for the expansion?
b. If sales are expected to increase at a rate of 15 percent per year, how long will
it take to pay back the expansion?

Explanation / Answer

Currently the wheels cost $4 each to buy.
double rate= 8$
unit cost of production would be $3.50
difference: 8-3.50=4.50$
let the stroller has 4 wheels
so, annual saving by making the wheels= 10000*4.5$*4
= 180000$
total investment= 800000
payback time= 800000/45000= 4.44 years.
if , sales are to increase at rate of 15% per year,
in the same way calculate the componud payback time,
which whold come around 2.5 years.

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