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$3.75Direct labor3.60Variable overhead1.80Fixed overhead4.60

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 $35,000. 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 $1.95 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 $0.25 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.

REQUIRED [USE THE PRESENT VALUE TABLES ON PAGE 113 TO COMPUTE NET PRESENT VALUES; BE SURE TO USE THE NEGATIVE SIGN WHEN SUBMITTING NEGATIVE NET PRESENT VALUES; DO NOT INCLUDE A DOLLAR SIGN]

1. Assuming a discount rate of 5%, what is the net present value if Nautical Creations uses their current equipment to produce the part?$-464,285

2. Assuming a discount rate of 5%, 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 $3.75 Direct labor 3.60 Variable overhead 1.80 Fixed overhead 4.60 The equipment will last for ve 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 veyear useful life with an estimated disposal value at that time of $35,000. 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 $1.95 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 $0.25 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. REQUIRED [USE THE PRESENT VALUE TABLES ON PAGE 113 TO COMPUTE NET PRESENT VALUES; BE SURE TO USE THE NEGATIVE SIGN WHEN SUBMITTING NEGATIVE NET PRESENT VALUES; DO NOT INCLUDE A DOLLAR SIGN] 1. Assuming a discount rate of 5%, what is the net present value if Nautical Creations uses their current equipment to produce the part? $464,285 mines! \\.. 1. ieagirtaee 159-8846 9 WM 2. Assuming a discount rate of 5%, what is the net present value if Nautical Creations buys the new equipment to produce the part? :1