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 2008 for $200,000. It is now early in 2013, and the manager of the Model Ships Division, Jeri Finley, is contemplating three alternatives.

Alternative 1 - Continue to produce the complex part using the current equipment. The following are last year's average per-unit manufacturing costs, when production was 8,400 ships:

Direct materials	$3.95
Direct labor	3.70
Variable overhead	1.60
Fixed overhead	4.45
Total unit cost	$13.70

The equipment will last for five more years with zero disposal value at that time. It can be sold immediately for $35,000. Alternative 2 - Purchase the complex part from an outside supplier. An outside supplier has offered to supply the complex part for $12.25 per part as a once-only offer, and Nautical Creations would have to guarantee to purchase at least 7,000 parts in each of the next five years. Finley predicts that 45% of the fixed overhead will be saved if production of the part is eliminated. Alternative 3 - Continue to produce the complex part with new, more efficient equipment. The cost of the new equipment is $225,000 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 $2.05 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. Fixed overhead costs will not change. Finley expects production to continue at 8,400 ships in each of the next five years. Assume a discount rate of 5%.

THE PRESENT VALUE TABLES Period 5% 6% 7% 8% 9% 10% 11% 1 0.952 0.943 0,935 0.926 0.917 0.909 0.901 2 0.907 0.890 0.873 0.857 0.842 0.826 0.812 3 0.864 0.840 0.816 0.794 0.772 0.751 0.731 4 0.823 0.792 0.763 0.735 0.708 0.683 0.659 5 0.784 0.747 0.713 0.681 0.650 0.621 0.593

Questions:

1. What is the net present value if Nautical Creations keeps their current tools and produces the part themselves? 2. What is the net present value if Nautical Creations buys the part from the supplier? 3. What is the net present value if Nautical Creations buys the new tools and produces the part themselves?