Baby Doll Shop manufactures wooden parts for dollhouses. The worker is paid $8.1

Question

Baby Doll Shop manufactures wooden parts for dollhouses. The worker is paid $8.10 an hour and, using a handsaw, can produce a year's required production (1,600 parts) in just eight 40-hour weeks. That is, the worker averages five parts per hour when working by hand. The shop is considering purchasing of a power band saw with associated fixtures, to improve the productivity of this operation. Three models of power saw could be purchased: Model A (the economy version), model B (the high-powered version), and model C (the deluxe high-end version). The major operating difference between these models is their speed of operation. The investment costs, including the required fixtures and other operating characteristics, are summarized as follows: Draw the cash flow for each option including by Hand. Assume that MARR = 10% .Are there enough savings to purchase any of the power band saws Based on the rate-of-return principle Which model is most economical Explain fully why your choice is the best one.

Explanation / Answer

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Cash Flows from Each Alternative By Hand Economy H.Powered Deluxe Initial Investment 0 $4,000 $6,000 $7,000 Less: Salvage Value 0 400 600 700 Net Cost 0 3600 5400 6300 Service Live 0 20 20 20 Depreciation P.a 180 270 315 Annual Cost 2592 1296 867 648 Total Cash Flow 2592 1476 1137 963 PV of Cashflows Y0 0 4000 6000 7000 PV of Salvage Value Today 0 59.45745 89.1861768 104.05 Annual Power Cost 0 400 420 480 Annual Cost 2592 1296 867 648 (Assumed Incuured at the beginning of year) Net Cash Flow 2592 5636.543 7197.81382 8023.9 No of parts 1600 1600 1605 1600 Cost Per Part 1.62 3.522839 4.4846192 5.015 Since the cost is least in By Hand mode, We should choose it

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