Question 7.5 You own a small fabrication shop that has specialized in custom wor
ID: 2789241 • Letter: Q
Question
Question 7.5
You own a small fabrication shop that has specialized in custom work for construction projects. ju are contemplating purchasing a CNC water jet cutter machine. This machine uses an ultra ream with suspended fine grit to cold cut materials. It is especially useful high pressure water st alloy work and to cut intricate patterns of architectural materials such as marble, since in each these applications, the heat generated by oth oroperties of the alloy and discolors the architectural materials). s the You have the following estimates for the machine: Installed cost $112,000 Operating cost Saleable Machine Hours ear Year 2 $31/h (includes maintenance and power) ear 3+ Useful life of the machine 800 1,200 1,450 15 years your you are contemplating this decision, the going interest rate for long-term debt to CO ext pany that would be secured by assets is 8.5%. You have not decided yet whether to borrow etra funds for the purchase. ae would you price the machine, i.e., ncreasing over the first two y you price the machine, i.e., what charge-out rate per hour would you propose f y and justify an appropriate discount rate (one to two sen ave an initial higher price followed by a vng over the first two years, would it make sense to have an iti higher price followed by aExplanation / Answer
The breakeven point as per table below is $48 per hour so price should be more than $48 per hour The discount rate for our purpose is assumed to be 8% in case debt is assumed for purchase of machine. .COst of equity could have been used if machine would have been funded through equity. As chargeability is per hour, the charges will be adjusted according to saleable hours. Installed Cost $1,12,000 Saleable Cost $48 Operating Cost $31 Saleable Machine Hours Hours PVF at Discount Rate (8.5%) Interest Payments (annual) Net Earnings PV of net earnings 1 800 0.92 8,960.00 $4,319 3,981.10 2 1200 0.85 8,960.00 $10,959 9,309.39 3 1450 0.78 8,960.00 $15,109 11,829.03 4 1450 0.72 8,960.00 $15,109 10,902.33 5 1450 0.67 8,960.00 $15,109 10,048.23 6 1450 0.61 8,960.00 $15,109 9,261.04 7 1450 0.56 8,960.00 $15,109 8,535.52 8 1450 0.52 8,960.00 $15,109 7,866.84 9 1450 0.48 8,960.00 $15,109 7,250.54 10 1450 0.44 8,960.00 $15,109 6,682.53 11 1450 0.41 8,960.00 $15,109 6,159.01 12 1450 0.38 8,960.00 $15,109 5,676.51 13 1450 0.35 8,960.00 $15,109 5,231.81 14 1450 0.32 8,960.00 $15,109 4,821.94 15 1450 0.29 8,960.00 $15,109 4,444.19 1,12,000.00
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