Question

Nautical Creations is one of the largest producers of miniature ships in a bottle. An especially complex part of one of the ships needs special production equipment that is not useful for other products. The company purchased this equipment early in 2008 for $200,000. It's now January 1, 2020, and the manager of the Model Ships Division, Jeri Finley, is considering two alternatives.

Alternative 1 - Continue to produce the complex part using the current equipment.

The following are last year's average per-unit manufacturing costs, when production was 8,000 ships:

Direct materials	$3.95
Direct labor	3.75
Variable overhead	1.50
Fixed overhead	4.40

The equipment will last for five more years with zero disposal value at that time. It can be sold immediately for $25,000.

Alternative 2 - Continue to produce the complex part with new, more efficient equipment.

The cost of the new equipment is $220,000 and will have a five-year useful life with an estimated disposal value at that time of $30,000. The sales representative selling the new equipment stated, "The new equipment will allow direct labor and variable overhead to be reduced by a total of $2.15 per unit." Finley thinks this estimate is accurate, but also knows that a higher quality of direct material will be necessary with the new equipment, costing $0.25 more per unit. Fixed overhead costs will not change.

Finley expects production to continue at 8,000 ships in each of the next five years.

REQUIRED [USE THE PRESENT VALUE TABLES ON PAGE 118 TO COMPUTE NET PRESENT VALUES; BE SURE TO USE THE NEGATIVE SIGN WHEN SUBMITTING NEGATIVE NET PRESENT VALUES; DO NOT INCLUDE A DOLLAR SIGN]

1. Assuming a discount rate of 7%, what is the net present value if Nautical Creations uses their current tools to produce the part?

Tries 0/5

2. Assuming a discount rate of 7%, what is the net present value if Nautical Creations buys the new tools to produce the part?

Answer 1