For a new product, the marketing department predicts that sales are expected to be 100,000 units in year 1, increasing by 15,000 each subsequent year to 175,000 in year 6. There are 2 different manufacturing process available: Option A: A manufacturing machine with up-front equipment purchase cost of $150,000 and the manufacturing cost per unit is $0.70. At the end of 6 years, the equipment salvage recovery is $20,000. Option B: A machine with up-front purchase cost of $200,000 with a manufacturing cost of $0.50 per unit, and equipment salvage recovery at the end of 6 years of $40,000. Assume an interest rate of 5% and a production period of 6 years. Which option should you choose based on a present equivalent evaluation with no considerations for depreciation? 1. What is the present equivalent cost of Option A? 2. What is the present equivalent cost of Option B?
For a new product, the marketing department predicts that sales are expected to be 100,000 units in year 1, increasing by 15,000 each subsequent year to 175,000 in year 6. There are 2 different manufacturing process available:
Option A: A manufacturing machine with up-front equipment purchase cost of $150,000 and the
Option B: A machine with up-front purchase cost of $200,000 with a manufacturing cost of $0.50 per unit, and equipment salvage recovery at the end of 6 years of $40,000.
Assume an interest rate of 5% and a production period of 6 years.
Which option should you choose based on a present equivalent evaluation with no considerations for
1. What is the present equivalent cost of Option A?
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