Nautical Creations is one of the largest producers of miniature ships in a bottle. An especially complex part of one of the ships requires special production equipment that is not useful for other products. The company purchased this equipment early in 2018 for $100,000. It's now January 1, 2020, and the manager of the Model Ships Division, Jeri Finley, is considering replacing the current equipment with new equipment that is more efficient.

The following are last year's average per-unit manufacturing costs, when production was 15,200 ships:

Direct materials	$3.80
Direct labor	5.55
Variable overhead	1.70
Fixed overhead	4.35

The sales representative for the new equipment says, "The new equipment will allow direct labor to be reduced by $3.09 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 $0.26 more per unit. In addition, fixed overhead costs will increase by $1,500.

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 $10,000. The current equipment will also last for five more years. It will have zero disposal value at that time, but it can be sold immediately for $35,000.

Finley expects production to continue at 15,200 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] 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?

MO Mociu 2. Text & SAMPLE PROBLES 113 Table 1: Present Value of $1.00 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 13 0.879 14 0.870 2% 0.980 0.961 0.942 0.924 0.906 0.800 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 0.837 0.813 0.789 0.766 0.744 0.722 0.701 0.681 0.661 4% 0.962 0.925 0.889 0.855 0.822 0.790 0.790 0.760 0.731 0.703 0.676 0.650 0.625 0.601 0.577 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 0.505 6% 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 0.000 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% 0.909 0.901 0.8930.885 0.877 0.870 0.826 0.812 0.797 0.783 0.797 0.783 0.769 0.756 0.751 0.731 0.712 0.693 0.675 0.658 0.683 0.05% 0.659 0.636 0.613 0.592 0.572 0.02 0.621 0.393 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 0.287 0.261 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 0.1600.141 0.887 Table 2: Present Value of an Annuity of $1.00 5% 6% 8% 2.884 2.444 2.91 Period 1% 2% 3% 4% 1 0.990 0.980 0.971 0.962 2 1.970 1.942 1.913 1.886 3 2.941 2.829 2.775 04 4 3.902 3.808 3.717 3.630 5 4.853 4.713 4.580 4,452 2016 203 6 5.795 5.601 5.417 5.242 . 2. 7 20 6.728 6.472 6.230 6,002 D. 8 7.652 7.325 7.020 6.733 0.12 G 8 566 8.566 9 8.162 7.786 1932 7.435 10 0421 9.471 8.983 8.530 8.111 11 10.368 9.787 9.253 8.760 12 11.255 10.575 9.385 13 12.134 11.348 10.635 9.986 14 13.004 12.106 11.296 10.563 0.952 1.859 2.723 3.546 4.329 5.076 wan 5.786 6,463 7.108 7.722 8.306 0.943 1.833 2.673 3.465 . 4.212 4,917 5.582 6.210 Day 6.802 0.00 7360 1.300 7.887 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 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% 10% 11% 12% 13% 14% 15% 0.917 0.909 0.901 0.893 0.885 0.877 0.870 1.759 1.736 1.713 1.690 1.6681.647 1.626 2.531 2.487 2.402 2.361 2.322 1.203 2.283 3.240 3.170 3.102 3.037 2024 2.974 2.914 2.855 3.890 3.791 3.696 3.605 3.517 3.433 3.352 2017 3.433 DE 4.486 4.355 4.231 4.111 3.9983.889 3.00 3.784 5.033 4.8684.712 4.564 4.423 4.288 4.160 1.100 1.100 5.535 5.335 5.146 4.968 4.799 4630 4.487 7.00 5.995 5.759 5.537 5.328 5.132 4.946 4.772 * 2 6.418 6.145 5.889 5.650 5.426 5.216 5.019 3.019 6.805 6,495 6.207 5.938 5.938 5.687 5.453 5.234 7.161 6.814 6.4926.194 5.918 5.660 5.421 7.487 7.103 6.750 6.424 6.122 5.8425.583 7.786 7.3676.982 6.628 6.302 6.002 6.0025.724 9.954 8.863 8.384 9.394 8.853 9.899 9.295 MO Mociu 2. Text & SAMPLE PROBLES 113 Table 1: Present Value of $1.00 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 13 0.879 14 0.870 2% 0.980 0.961 0.942 0.924 0.906 0.800 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 0.837 0.813 0.789 0.766 0.744 0.722 0.701 0.681 0.661 4% 0.962 0.925 0.889 0.855 0.822 0.790 0.790 0.760 0.731 0.703 0.676 0.650 0.625 0.601 0.577 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 0.505 6% 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 0.000 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% 0.909 0.901 0.8930.885 0.877 0.870 0.826 0.812 0.797 0.783 0.797 0.783 0.769 0.756 0.751 0.731 0.712 0.693 0.675 0.658 0.683 0.05% 0.659 0.636 0.613 0.592 0.572 0.02 0.621 0.393 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 0.287 0.261 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 0.1600.141 0.887 Table 2: Present Value of an Annuity of $1.00 5% 6% 8% 2.884 2.444 2.91 Period 1% 2% 3% 4% 1 0.990 0.980 0.971 0.962 2 1.970 1.942 1.913 1.886 3 2.941 2.829 2.775 04 4 3.902 3.808 3.717 3.630 5 4.853 4.713 4.580 4,452 2016 203 6 5.795 5.601 5.417 5.242 . 2. 7 20 6.728 6.472 6.230 6,002 D. 8 7.652 7.325 7.020 6.733 0.12 G 8 566 8.566 9 8.162 7.786 1932 7.435 10 0421 9.471 8.983 8.530 8.111 11 10.368 9.787 9.253 8.760 12 11.255 10.575 9.385 13 12.134 11.348 10.635 9.986 14 13.004 12.106 11.296 10.563 0.952 1.859 2.723 3.546 4.329 5.076 wan 5.786 6,463 7.108 7.722 8.306 0.943 1.833 2.673 3.465 . 4.212 4,917 5.582 6.210 Day 6.802 0.00 7360 1.300 7.887 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 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% 10% 11% 12% 13% 14% 15% 0.917 0.909 0.901 0.893 0.885 0.877 0.870 1.759 1.736 1.713 1.690 1.6681.647 1.626 2.531 2.487 2.402 2.361 2.322 1.203 2.283 3.240 3.170 3.102 3.037 2024 2.974 2.914 2.855 3.890 3.791 3.696 3.605 3.517 3.433 3.352 2017 3.433 DE 4.486 4.355 4.231 4.111 3.9983.889 3.00 3.784 5.033 4.8684.712 4.564 4.423 4.288 4.160 1.100 1.100 5.535 5.335 5.146 4.968 4.799 4630 4.487 7.00 5.995 5.759 5.537 5.328 5.132 4.946 4.772 * 2 6.418 6.145 5.889 5.650 5.426 5.216 5.019 3.019 6.805 6,495 6.207 5.938 5.938 5.687 5.453 5.234 7.161 6.814 6.4926.194 5.918 5.660 5.421 7.487 7.103 6.750 6.424 6.122 5.8425.583 7.786 7.3676.982 6.628 6.302 6.002 6.0025.724 9.954 8.863 8.384 9.394 8.853 9.899 9.295