Cost value
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The engraving department uses an aging rotary engraver to engrave plaques and trophies. The machine has been reliable, but requires regular maintenance and periodic replacement of parts. Charlie has just found out that this engraver will no longer be supported by the manufacturer. This means that service and parts will be hard to get in the future and if it breaks it could take up to three weeks to get a new machine up and running. They keep this machine running almost 8 hours a day, every day. Each day that the engraver is down will cost around $975 in lost income.
If Charlie has to buy a new engraver, it would cost around $25,000.
Charlie can get a one-year loan at 12% to buy a new engraver, but he worries that this is a lot of money to spend, especially since the old engraver is still working fine. He has to make a decision.
Should he purchase a new engraver now or wait until the old engraver breaks before ordering a new engraver?
What you know:
New engraver cost: $25,000
One-year loan cost: 12% interest
Revenue per day from engraving: $975
Profit margin on engraving: 25%
Potential days lost, if engraver breaks: 18
What you are looking for:
1. Cost of new engraver in total if the full value is financed by a 12% loan (not including tax)
2. Total amount of revenue that could be lost if the engraver breaks
3. Amount of net profit that could be lost if the engraver breaks
4. How long it will take to pay for the engraver if the entire net profit is allocated toward paying for it?
5. Any other considerations that Charlie should factor into his buying decision
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Solution Summary
Cost value equipment is examined.
Solution Preview
1. The total cost would be 28,000 if the engraver is financed.
2. The total cost in lost revenue would be 20475 dollars. $975 per day x 21 days (3weeks)
3. The net profit lost would be the 20,475 x 0.25= $5118.75
4. ...
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