(Ignore income taxes in this problem.) A newly developed device is being conside

Question

(Ignore income taxes in this problem.) A newly developed device is being considered by Fairway Foods for use in processing and canning peaches. The device, which is available only on a royalty basis, is reported to be a great labor saver. Fairway's production manager has gathered the following data: Present labor method Proposed royalty method Per year: Labor cost $ 40,000 $ 5,000 Royalty cost - $ 20,000 Initial startup costs associated with the new device - $ 100,000 The new device must be obtained through a licensing arrangement with the developer. The license period lasts for only 8 years. Fairway Foods' required rate of return is 10%. Required: a. By use of the incremental cost approach, compute the net present value of the proposed licensing of the new device. (Round "PV Factor" to 3 decimal places. Round your other intermediate calculations and final answers to the nearest whole dollar.) (Use Exhibit 11B-2) Net present value $ b. Should the company enter into a licensing arrangement to use the new device? Yes No

Explanation / Answer

B YES

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