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1. Bachmerica Industries now buys a certain part for its construction equipment (Option A). They believe that the real price of purchased parts will remain
1. Bachmerica Industries now buys a certain part for its construction equipment (Option A). They believe that the real price of purchased parts will remain fixed over the next five years. The managers are considering the production of the part in-house (Option B). They can install a production system that would have a life of five years with no salvage value. They expect their real price of labour and other inputs to in-house production to rise over the next five years. Further information about the situation is in the tables below. They require 25,000 units per year. Their current dollar MARR is 20%. Option A: Purchase Annual cost of purchase ($/year) 750 000 Expected real change in cost of purchase 0% Option B: In House First cost ($) 200 000 Labour cost/unit (first year of operations) ($) 10.5 Other operating cost/unit (first year of operations) ($) 9 Expected real change in labour costs (yearly) 4% Expected real change in other operating costs (yearly) 2% a) Assume inflation is 2 percent per year in the first year of operation. What will be the current dollar cost of labour for in-house production in the second year? b) Assume inflation is 2 percent per year in the first two years of operation. What will be the current dollar cost of other operating inputs for in-house production in the third year? c) Assume that inflation averages 2 percent per year over the five-year life of the project. What is the present worth of costs for purchase and for in-house production over five-years
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