Question
A manufacturing company decided to buy an automated machine in order to produce a new kind of computer accessories. The designed production capacity of this
A manufacturing company decided to buy an automated machine in order to produce a new kind of computer accessories. The designed production capacity of this company is 300,000 units per year. As the Chief Executive Officer (CEO) of this company, Amanda proposed a machine procurement plan, in which:
⚫ Investment in machine purchasing is $800,000;
⚫ Selling price of each unit is $5;
⚫ Cost of raw material is $2.5 per unit;
⚫ Packaging cost is $0.5 per unit;
Annual labor cost is $200,000;
⚫ Annual expenses for machine maintenance is $150,000;
⚫ This machines can be used for 8 years;
⚫ The salvage value (market value) after 8 years is $25,000.
(1)Calculate the annual Variable Cost and Fixed Cost in Amanda’s proposal. [5 marks]
(2)Calculate the net cash flow in each year (From year 0 to year 8). [10 marks]
(3)When the company determines the minimum attractive rate of return (MARR),
what factors should be considered? [5 marks]
(4)If the MARR of this company is 15% per year. Based on the PW method, should
the machine suggested by Amanda be accepted? [10 marks]
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