Question
The Baby Products Group of Valles Galactic Industries is considering investing in a new process for making their premiere product: the chile-shaped baby bottle. This
The Baby Products Group of Valles Galactic Industries is considering investing in a new process for making their premiere product: the chile-shaped baby bottle. This project results from some unfortunate publicity resulting from quality issues on baby bottles made with their current process equipment. Specifically, they have three options: two machines that they can buy, or they can subcontract to another manufacturer.
Mold-tastic: Costs $1,280,000, has annual operating costs of $285,000, annual productivity gains of $150,000 in year 1 with a forecasted annual increase of $75,000, and a service life of five years.
No-Flash: Costs $1,850,000, has annual operating costs of $100,000, annual productivity gains of $175,000 in year 1 with a 25% per year increase and a service life of five years.
C: Subcontract to SohnCo Baby Products Division at an annual cost of $350,000, guaranteed for four years with a four-year commitment. SohnCo will offer an option for a fifth year at $500,000. In the event, VGI uses the SohnCo option, they will earn $$125,000 (pretax) a year from sales of the baby bottles. Of some concern is that SohnCo BPD offers a similar product and some VGI managers have wondered about maintaining their intellectual property during and after the subcontract. Nonetheless, this is an active potential alternative.
Use a MARR of 10%, MACRS depreciation, and assume a combined tax rate of 22% and assess options using present worth. Under what conditions, if any, might SohnCo be a better option?
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