Question

Course Contents utical Creations is one of the largest producers of miniature ships in abottle. An especially complex part of one of the ships needs special production equipment that is not useful for other products. The compa rchased this equipment early in 2015 for $200,000. It is now early in 2019, and the manager of the Model Ships Division, Jeri Finley, is thinking about purchasing new equipment to make this part. The current quipment will last for six more years with zero disposal value at that time. It can be sold immediately for $40,000. The following are last year's total manufacturing costs, when production was 9,000 ships: Direct materials Direct labor Variable Fixed overhead $35,550 3,300 16,200 41,85o $126,900 overhead Total The cost of the new equipment is $140,000. It has a s" rea, useful life with an ostinated disposal ve ·at that time of S4S,000. The sales representative seang the-equpment-ated aphe new-qu nent wi allow direct labor and variable overhead combined to be reduced by a total of $1.90 per unit." Finley thinks this estimate is accurate, but also knows that a higher quality of direct material wil be necessary with the new equipmenvt, costing $0.21 more per unit. Fixed overhead costs wll decrease by $3,500. Finley expects production to be 9,500 ships reach of the next six years. Assume a discount rate of 3%. 1. What is the difference in net present values if Nautical Creations buys the new equipment instead of keeping their current equipment Submit Answer Tries /10

Answer 1

NPV = Present value of cash inflows – present value of cash outflows

= 40,000-140,000 + {(1.90-0.21)*9,500+3,500}*PVAF(3%, 6 years)+ 45,000*PVF(3%, 6 years)

= -100,000 + 19,555*5.4172 + 45,000*0.8375

= $43,620.85