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 8,400 ships:

Direct Materials : $3.75

Direct labor : 3.85

Variable overhead : 1.65

Fixed overhead : 4.65

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 $220,000 and will have a five-year useful life with an estimated disposal value at that time of $40,000. 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 $2.00 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 $0.17 more per unit. In addition, fixed overhead costs will increase by $2,000.

Finley expects production to continue at 8,400 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 7%, what is the net present value if Nautical Creations uses their current equipment to produce the part?

2. Assuming a discount rate of 7%, what is the net present value if Nautical Creations buys the new equipment to produce the part?

Present Values :

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 8,400 ships: Direct materials $3.75 Direct labor 3.85 Variable overhead 1.65 Fixed overhead 4.65 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 $220,000 and will have a five-year useful life with an estimated disposal value at that time of $40,000. 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 $2.00 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 $0.17 more per unit. In addition, fixed overhead costs will increase by $2,000. Finley expects production to continue at 8,400 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 7%, what is the net present value if Nautical Creations uses their current equipment to produce the part? Submit Answer Tries 0/5 2. Assuming a discount rate of 7%, what is the net present value if Nautical Creations buys the new equipment to produce the part? Submit Answer Tries 0/5 Moouu 2: TexTa SAMPLE PROBLEMS 113 Table 1: Present Value of $1.00 4% 6% UPHE 11 Period 1% 1 0.990 2 0.980 3 0.971 4 0.961 5 0.951 6 0.942 7 0.933 8 0.923 9 0.914 10 0.905 11 0.896 12 0.887 13 0.879 14 0.870 E 2% 0.980 0.961 0.942 1.924 0.906 0.888 0.871 0.853 0.837 0.820 0.804 0.788 0.773 0.758 3% 0.971 0.943 0.915 0.888 0.863 0.837 0.813 0.789 0.766 0.744 0.722 0.701 0.681 0.661 0.962 0.925 0.889 0.855 0.822 0.790 0.760 0.731 0.703 0.676 0.650 0.625 0.601 0.577 JULI 5% 0.952 0.907 0.864 0.823 0.784 0.746 0.711 0.677 0.645 0.614 0.585 0.557 0.530 0.sos 0.943 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 0.527 0.497 0.469 0.442 7% 0.935 0.873 0.816 0.763 0.713 0.666 0.623 0.582 0.544 0.508 0.475 0.444 0.415 0.388 8% 0.926 0.857 0.794 0.735 0.681 0.630 0.583 0.540 0.500 0.463 0.429 0.397 0.368 0.340 9% 0.917 0.842 0.772 0.708 0.650 0.596 0.547 0.502 0.460 0.422 0.388 0.356 0.326 0.299 10% 11% 12% 13% 14% 15% 0.9090.901 0.893 0.885 0.877 0.870 0.826 0.812 0.797 0.783 0.769 0.756 0.751 0.731 0.712 0.693 0.675 0.658 83 0.659 0.636 0.613 0.592 0.572 0.621 0.593 0.567 0.543 0.519 0.497 0.564 0.535 0.507 0.480 0.456 0.432 0.513 0.482 0.452 0.425 0.400 0.376 0.467 0.434 0.404 0.376 0.351 0.327 0.424 0.391 0.361 0.333 0.308 0.284 0.386 0.352 0.322 0.295 0.270 0.247 0.350 0.317 0.2870.261 0.237 0.215 0.319 0.286 0.257 0.231 0.208 0.187 0.290 0.258 0.229 0.204 0.182 0.163 0.263 0.232 0.205 0.181 0.160 0.141 L IIII ID 1 Table 2: Present Value of an Annuity of $1.00 Period 1 2 3 4 5 TUE 6 7 8 1% 0.990 1.970 2.941 3.902 4.853 5.795 6.728 7.652 8.566 9.471 10.368 11.255 12.134 13.004 2% 0.980 1.942 2.884 3.808 4.713 5.601 6.472 7.325 8.162 8.983 9.787 10.575 11.348 12.106 3% 0.971 1.913 2.829 3.717 4.580 5.417 6.230 7.020 7.786 8.530 9.253 9.954 10.635 11.296 0.962 1.886 2.775 3.630 4.452 5.242 6.002 6.733 7.435 8.111 8.760 9.385 9.986 10.563 5 0.952 1.859 2.723 3.546 4.329 5.076 5.786 6.463 7.108 7.722 8.306 8.863 9.394 9.899 0.943 1.833 2.673 3.465 4.212 4.917 5.582 6.210 6.802 7.360 7.887 8.384 8.853 9.295 7% 0.935 1.808 2.624 3.387 4.100 4.767 5.389 5.971 6.515 7.024 7.499 7.943 8.358 8.745 8% 0.926 1.783 2.577 3.312 3.993 4.623 5.206 5.747 6.247 6.710 7.139 7.536 7.904 8.244 9% 0.917 1.759 2.531 3.240 3.890 4.486 5.033 5.535 5.995 6.418 6.805 7.161 7.487 7.786 10% 11% 12% 13% 14% 15% 0.909 0.901 0.893 0.885 0.877 0.870 1.736 1.713 1.690 1.668 1.647 1.626 2.487 2.444 2.402 2.361 2.322 2.283 3.170 3.102 3.037 2.974 2.914 2.855 3.791 3.696 3.605 3.517 3.433 3.352 4.355 4.231 4.111 3.998 3.889 3.784 4.8684.712 4.564 4.423 4.288 4.160 5.335 5.146 4.968 4.799 4.6394.487 5.7595.537 5.3285.132 4.9464.772 6.145 5.889 5.650 5.426 5.216 5.019 6.495 6.207 5.9385,6875,4535.234 6.814 6.492 6.1945.918 5.660 5.421 7.103 6.750 6.4246.122 5.842 5.583 7.367 6.982 6.628 6.302 6.002 5.724 H 9 10 IND 1 12 13 14