1. Assuming a discount rate of 7%, what is the net present value if Nautical Creations uses their current equipment to produce the part?

2. Assuming a discount rate of 7%, what is the net present value if Nautical Creations buys the new equipment to produce the part?

Nautical Creations is one of the largest producers of miniature ships in a bottle. An especially complex part of one of the ships needs special production equipment that is not useful for other products. The company purchased this equipment early in 2018 for $200,000. It's now January 1, 2020, and the manager of the Model Ships Division, Jeri Finley, is considering two alternatives. Alternative 1 - Produce the complex part using the current equipment. The following are last year's average per-unit manufacturing costs, when production was 7,800 ships: Direct materials $3.60 Direct labor 3.50 Variable overhead 1.75 Fixed overhead 4.50 The equipment will last for five more years with zero disposal value at that time. It can be sold immediately for $40,000. Alternative 2 - Produce the complex part with new, more efficient equipment. The cost of the new equipment is $200,000 and will have a five-year useful life with an estimated disposal value at that time of $30,000. The sales representative selling the new equipment stated, "The new equipment will allow direct labor and variable overhead to be reduced by a total of $2.20 per unit." Finley thinks this estimate is accurate, but also knows that a higher quality of direct material will be necessary with the new equipment, costing $0.15 more per unit. In addition, fixed overhead costs will increase by $2,500. Finley expects production to continue at 7,800 ships in each of the next five years