Currently, the cost of each battery is $300 per unit. The company feels that they could greatly reduce the cost if the production team makes each battery. However, to produce these batteries, the company will need to purchase specialized equipment that costs $1,670,000. However, this equipment will have a useful life of 10 years, and is expected to have a salvage value of $99,700 at the end of that time.

Currently, the company purchases 2,500 batteries per year, and the company expects that the production will remain the same for the coming 10-year period. To make the batteries, the company expects that they will need to purchase direct materials at a cost of $100 per battery produced. In addition, the company will need to employ two production workers to make the batteries. The workers likely work 2,080 hours per year and make $25 per hour. In addition, health benefits will amount to 20% of the workers' annual wages. In addition, variable manufacturing overhead costs are estimated to be $20 per unit.

Because there is currently unused space in the factory, no additional fixed costs would be incurred if this proposal is accepted. The company's cost of capital (hurdle rate) has been determined to be 12% for all new projects, and the current tax rate of 21% is anticipated to remain unchanged. The pricing for the company's products as well as number of units sold will not be affected by this decision. The straight-line depreciation method would be used if the new equipment is purchased.

Cost of new equipment

Expected life of equipment in years

Salvage Value

Life Production

Annual production or purchase needs

Number of workers needed

Annual hours to be worked per employee

Earnings per hour for employees

Health Benefits - % of Wages

Cost of Direct Materials

Variable Manufacturing Overhead Costs

Unit Cost to Purchase Batteries

Required rate of return

Tax rate