Hesselwood Company’s market research division has projected a substantial increase in demand over the next several years for one of the company’s products. To meet this demand, the company will need to produce units as follows:

Production

Year(s) in Units

1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000

2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000

3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000

4–10. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,500

At present, the company is using a single Model 2360 machine to manufacture this product. To increase its productive capacity, the company is considering two alternatives:

Required:

Ignore income taxes.

1. Which alternative should the company choose? Use the net present value approach. (Round to the nearest whole dollar.)

2. Suppose that the cost of direct materials increases by 50%. Would this make the Model 4720 machine more or less desirable? Explain. No computations are needed.

3. Suppose that the cost of direct labour increases by 25%. Would this make the Model 4720 machine more or less desirable? Explain. No computations are needed.

4. By how much would operating costs have to increase on average each year for the preferred alternative in part 1 to make the company indifferent between the two machines in terms of their net present values?