The company annually purchases 120,000 units of a specialized part, at a cost of $35 per part. They are evaluating the possibility of manufacturing the part "at home," which would require an initial investment of $2.8 million in machinery, $700,000 in facility preparation and another $150,000 in training. Once the new equipment is installed, it is estimated that the company could manufacture the parts at a cost of $30.00 per unit for the first two years and then lower it to $28 per unit from year 3 to year 10. The useful life of the equipment is estimated at 10 . years, during which time its residual value is estimated at $75,000

1.Calculate the "Payback Period" for this investment. (5 points) 2.If the company decides to invest only in projects with a "Pay-Back Period" of 3 years or less, would the investment be recommended? (3 points) 3.Evaluate the project by Present Value using a rate of 15%. In this case, would the investment be recommended? (10 points) 4.What fundamental disadvantages does the Pay-Back Period method have when compared to other alternative analysis methods? (5 points) 5.Calculate the "Discounted Payback Period" for this investment. Use a 15% rate of return (8 points) Let's say the company is interested in making the investment, but they want to evaluate the possibility of borrowing the money instead of buying cash. The company can take out a loan for the entire amount of the initial investment at an interest rate of 9% per year which will be paid in 10 equal payments at the end of each year. Build the flow chart and use the Present Value method to determine if under these conditions and with a MARR = 15% it is advisable to make the investment. Would you recommend taking the loan or buying cash?

Answer rating: 100% (QA)

Lets break down the calculations step by step 1 Payback Period Initial investment 2800000 machinery ... View the full answer