A certain product that is distributed and marketed by company X currently has a cost of purchase
Question:
A certain product that is distributed and marketed by company X currently has a cost of purchase of $100/unit. Company X with the purpose of reducing the purchase cost of this product is analyzing the possibility of buying the necessary equipment for its production. preliminary investigations of the required equipment indicate that its initial cost is $100,000 and its liquidation market value after 5 years of use is estimated at $20,000. Likewise, annual depreciation of $18,000 is established during the 5 years of the project. Also, if the equipment is purchased, the annual fixed costs would be $5,000 and the costs $25/unit variables. If the annual demand for this component is 500 units and its selling price is $150 per unit, considering that these elements will remain stable for the next few years,
a) Determine the Internal Rate of Return (IRR) of purchasing the equipment, if the marginal tax rate is 30% and the company covers the investment needs with its own funds.
b) Determine the Internal Rate of Return (IRR) of purchasing the equipment, if the marginal tax rate is 30% and the company agrees to finance 50% of the value of the equipment through a series of payments deferred payments of $10,000 per year for principal payment, and $3,500 per year for interest payments for 5 years. While the rest of the investment is covered with its own funds.
Managerial economics applications strategy and tactics
ISBN: 978-1439079232
12th Edition
Authors: James r. mcguigan, R. Charles Moyer, frederick h. deb harris