Question
You are the CFO for Play Now sports and you have 2 different machines to consider for purchase. The machines will be used to fabricate
You are the CFO for Play Now sports and you have 2 different machines to consider for purchase. The machines will be used to fabricate large size rubber balls that will sell for $30 each. The first machine will cost $45,000 and it will last for a period of 6 years. It will allow you to save $15,000 in year 1, $14,000 in year 2, $13,000 in year 3, $12,000 in year 4, $11,000 in year 5 and $10,000 in year 6. Using this machine will generate variable costs of products sold of $15 each. The other option is a machine that will last for only 5 years. It will cost $30,000 and it will save $8,000 each year. Variable costs, using this machine will be $18 each. Play Now Sports has fixed costs of $150,000 per year.
a. Calculate the PAYBACK PERIOD in full and incremental years for each machine.
(Marks will only be given if you show your calculations) (2 MARKS)
b. Calculate the Return on investment for each machine.
(Marks will only be given if you show your calculations) (2 MARKS)
c. How many rubber balls would Play Now need to sell to make $30,000 in profit for each machine? (Marks will only be given if you show your calculations) (2 MARKS)
d. If production is capped at 8,000 balls, how much would Play Now need to charge to break even if the FIRST machine is selected? (2 MARKS)
e. Which machine should Play Now choose and why? (2 MARKS)
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