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Calculating the present equivalent cost for given proposals

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The projected annual sales of new product 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.

Proposal A is to purchase manufacturing equipment costing $120,000 with an estimated salvage value of $20000 at the end of 10 years. Proposal B is to purchase manufacturing equipment costing $280,000 with an estimated salvage value of $50,000 at the end of 10 years. The variable manufacturing cost per unit under proposal A is estimated to be $0.80, but only $0.25 under proposal B.

If the interest rate is 9%, what is the Present Equivalent cost of each proposal for a 10-year production period? Which proposal should be accepted for a 10-year production period?

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Solution Summary

Solution depicts the steps to estimate the present equivalent cost for two competing proposals for a 10-year production period and highlights which is the stronger proposal.

$2.19