Mighty Manufacturing sell 100,000 units of product A per annum. They are planning to purchase a...
Mighty Manufacturing sell 100,000 units of product A per annum. They are planning to purchase a new machine to improve the quality of their product. The improved product will sell for a $2 higher price. However, the additional electricity will increase the annual factory overhead costs $50,000.The machine is expected to have a life of 5 years. If the opportunity cost of funds is 7% per annum, what is the maximum price that Mighty Manufacturing should consider paying for the machine?
Homework Answers
The annual inflow is $200000(100000 products at $2) - A
Annual expenditure is $50000 - B
Net benefit per year is $ 150000(A-B) - C
For 5 years - $ 750000(C*5 years)
Discounted factor at 7% for 5 years is 4.1002
Therefore max price is $ 3075150($750000*4.1002)
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