The annual sales of new Mechanical Pencil are projected
Subject: Business / Finance
Question
The annual sales of new Mechanical Pencil are projected to be 25,000 the first year and increase by 10,000 per year until 55,000 are sold during the fourth year.Sales are then predicted to decrease by 5,000 per year in the fifth year and each year thereafter until 25,000 are sold in the tenth year.
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Proposal A is to purchase manufacturing equipment costing $125,000 with an estimated salvage value of $20000 at the end of 10 years. Proposal B is to purchase manufacturing equipment costing $285,000 with an estimated salvage value of $50,000 at the end of 10 years. The variable manufacturing cost perunit under proposal A is estimated to be $0.80, but only $0.25 under proposal B.
a) If the interest rate is 9%, what is the Present Equivalent cost of each proposal for a 10-year production period?
b) Which proposal should be accepted for a 10-year production period?
