For a new product sales are expected to be 2,000 products in year 1, increasing

Question

For a new product sales are expected to be 2,000 products in year 1, increasing by

1,000 products each subsequent year to 5,000 products in year 4. Two different

manufacturing equipment options are available:

a) Up front equipment purchase cost of $14,000, with manufacture cost per unit of

$0.70, and equipment salvage recovery (at end of 4 years) of $3,000.

b) Up front equipment purchase cost of $21,000, with manufacture cost per unit of

$0.2, and equipment salvage recovery (at end of 4 years) of $4,000.

Assuming an interest rate of 8% over the 4 year production period, perform an economic

analysis and select the best option.

Explanation / Answer

Future cost=Principal amount+Interest

a)Future cost =14000+0.7*5000+(14000*4*8/100)+(0.7*2000*4*8/100)+(0.7*1000*3*8/100)+(0.7*1000*2*8/100)+(0.7*1000*1*8/100)-3000

                      =19746 $

b)Future cost =21000+0.2*5000+(21000*4*8/100)+(0.2*2000*4*8/100)+(0.2*1000*3*8/100)+(0.2*1000*2*8/100)+(0.2*1000*1*8/100)-4000

                     =24944

So first equipment is best option

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