Company Z.Z has developed a new product for which it anticipates an expected demand of: Year 1 : 300 units sold Year 2 : 400 units sold Year 3 : 600 units sold Year 4: 900 units sold Organization must choose between following production alternatives: (a) Purchase a large machine with a capacity of 1,000 units, useful life of 4 years for a cost of $28,000. b) Initially buy a small machine with a capacity of 500 units and a useful life of 2 years. In 2 more years purchase another small machine to replace the one first purchased. Cost of each small machine is $15,000. Large machine has a liquidation (residual) value of $400. Selling and administrative expenses are $5,000 for large machine and $2,500 for each small machine. Variable cost per unit produced is $40 for large machine and $45 for small
Company Z.Z has developed a new product for which it anticipates an expected demand of:
Year 1 : 300 units sold
Year 2 : 400 units sold
Year 3 : 600 units sold
Year 4: 900 units sold
Organization must choose between following production alternatives:
(a) Purchase a large machine with a capacity of 1,000 units, useful life of 4 years for a cost of $28,000.
b) Initially buy a small machine with a capacity of 500 units and a useful life of 2 years. In 2 more years purchase another small machine to replace the one first purchased. Cost of each small machine is $15,000.
Large machine has a liquidation (residual) value of $400. Selling and administrative expenses are $5,000 for large machine and $2,500 for each small machine.
Variable cost per unit produced is $40 for large machine and $45 for small machine. Selling price is $95, tax rate is 27% and project discount rate is 15%.
REQUEST: Calculate best alternative from the
Hint: As an aid, solution cash flows and NPV for each alternative are:
| 0 | 1 | 2 | 3 | 4 | NPV | |
| Cash flow large machine | (28,000) | 10,285 | 14,300 | 22,330 | 34,667 | 26,260 |
| Cash flow small machines | (15,000) | 11,150 | (15,200) | 22,300 | 33,250 | 16,876 |
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