Metallic Peripherals, Inc., has received a production contract for a new product. The contract lasts for 5 years. To do the necessary machiningoperations, the firm can use one of its own lathes, which was purchased 3years ago at a cost of $16,000. Today the lathe can be sold for $8,000. In 5years the lathe will have a zero salvage value. Annual operating andmaintenance costs for the lathe are $4,000/year. If the firm uses its own lathe, it must also purchase an additional lathe at a cost of $12,000; its value in 5 years will be $3,000. The new lathe will have annual operating and maintenance costs of $3,500/year. As an alternative, the presently owned lathe can be traded in for $10,000 and a new lathe of larger capacity purchased for a cost of $24,000; its value in 5 years is estimated to be $8,000, and its annual operating and maintenance costs will be $6,000/ year. Solve, a. Use the EUAC cash flow approach. b. Use the EUAC opportunity cost approach.An additional alternative is to sell the presently owned lathe and subcontract the work to another firm. Company X has agreed to do the work for the 5-year period at an annual cost of $12,000/end-of-year.Using a 15% interest rate, determine the least-cost alternative for performing the required production operations.
Metallic Peripherals, Inc., has received a production contract for a new product. The contract lasts for 5 years. To do the necessary machining
operations, the firm can use one of its own lathes, which was purchased 3
years ago at a cost of $16,000. Today the lathe can be sold for $8,000. In 5
years the lathe will have a zero salvage value. Annual operating and
maintenance costs for the lathe are $4,000/year. If the firm uses its own lathe, it must also purchase an additional lathe at a cost of $12,000; its value in 5 years will be $3,000. The new lathe will have annual operating and maintenance costs of $3,500/year. As an alternative, the presently owned lathe can be traded in for $10,000 and a new lathe of larger capacity purchased for a cost of $24,000; its value in 5 years is estimated to be $8,000, and its annual operating and maintenance costs will be $6,000/ year. Solve, a. Use the EUAC cash flow approach. b. Use the EUAC
An additional alternative is to sell the presently owned lathe and subcontract the work to another firm. Company X has agreed to do the work for the 5-year period at an annual cost of $12,000/end-of-year.
Using a 15% interest rate, determine the least-cost alternative for performing the required production operations.
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