Question

a. A supermarket chain buys loaves of bread from its supplier at $0.5 per loaf and sells them at $0.75 per loaf. The chain is considering two options to bake its own bread. Capital investment Useful life (Years) Annual fixed costs Machine A $8,000 7 $2,000 Machine B $12,000 7 $3,500 Neither machine has a market value at the end of seven years, and MARR is 10% per year. If the demand for bread at this supermarket is 20,000 loaves per year, what strategy should be adopted for acquiring bread? i. Continue buying from the supplier iii. Install Machine B ii. Install Machine A iv. Install both Machine A and Machine B

Answer 1

1.

Option B is correct!!.

Year	Buy from Supplier	Machine A	Machine B	PVF @ 10%	PV Buy from Supplier	PV Machine A	PV Machine B
N	A	B	C	D	E=A*D	F=B*D	G=C*D
-	-	8,000	12,000	1.000	-	8,000	12,000
1	10,000	2,000	3,500	0.909	9,091	1,818	3,182
2	10,000	2,000	3,500	0.826	8,264	1,653	2,893
3	10,000	2,000	3,500	0.751	7,513	1,503	2,630
4	10,000	2,000	3,500	0.683	6,830	1,366	2,391
5	10,000	2,000	3,500	0.621	6,209	1,242	2,173
6	10,000	2,000	3,500	0.564	5,645	1,129	1,976
7	10,000	2,000	3,500	0.513	5,132	1,026	1,796
	70,000	22,000	36,500	Present Values	48,684	17,737	29,039
						Lowest PV hence recommended

2.

Depreciation rate = 100/8 => 12.5%.

At 150% DDB = 12.5 *1.5 => 18.75%

Year	Opening Book Value	Depreciation @ 18.75%	Closing BV
1	20,000	3,750	16,250
2	16,250	3,047	13,203
3	13,203	2,476	10,728
4	10,728	2,011	8,716
5	8,716	1,634	7,082

Year 5 closing book value is close to 7,000. Hence Option C is correct!!.

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