1. A baby stroller manufacturer buys the wheels from a company. Currently the pr

Question

1. A baby stroller manufacturer buys the wheels from a company. Currently the price of one wheel is $4 each but for a number of reasons they are planning to double the price in the near future. If they want to produce the wheels themselves, they need to add additional facilities for $800,000. The estimated unit cost of production would be S3.50. Currently the company sells 10,000 strollers per year. (Assume 4 wheels per stroller). a. How long would i take to pay back the investment required for the expansion assuming the current sales rate? b. If sales are expected to grow at a rate of 15% per year, how long would it take to pay back the expansion?

Explanation / Answer

a)4-3.5= 0.5 profit margin

10000*4*0.5=20000

Payback period = 800000/20000=40

So it takes 40 years to pay back the investment

b)Let us consider that it takes x years to pay back the investment in this case

4*40000*(1+0.15)^x – 3.5*40000*(1+0.15)^x = 800000

1.15^x=40

X=28

It would take 28 years to pay back the investment

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