Madam Grace is a beautician based in the Sahel Island where she learned how manufacture product...

  

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Madam Grace is a beautician based in the Sahel Island where she learned how manufacture product "Amino". She estimated that each unit of the product should sell for $25... per unit. Currently variables cost of production is $24.5 per unit, and fixed cost are 100 per unit. Due to the old age of the existing machine, production cost has increased and this has affected demand for the firm's product. As a result Madam Grac, has made an arrangement to by a new (more efficient) machine form a customer based in Japan to increase the asset turnover rate. This machine is available for ¢180,000. It is expected that variable cost per unit will be ¢24. The firm will incur additional fixed cost of 14,500 annually as a direct consequence of purchasing the new machine. The machine would have an expected life of 5 years and would have a terminal value of $20,000. Annual demand of product "Amino is projected to be 150,000 units. In that industry, average investment attract a cost of capital of 10% per annum. Required: is the new investment worthwhile or should the new machine be purchased? Madam Grace is a beautician based in the Sahel Island where she learned how manufacture product "Amino". She estimated that each unit of the product should sell for $25... per unit. Currently variables cost of production is $24.5 per unit, and fixed cost are 100 per unit. Due to the old age of the existing machine, production cost has increased and this has affected demand for the firm's product. As a result Madam Grac, has made an arrangement to by a new (more efficient) machine form a customer based in Japan to increase the asset turnover rate. This machine is available for ¢180,000. It is expected that variable cost per unit will be ¢24. The firm will incur additional fixed cost of 14,500 annually as a direct consequence of purchasing the new machine. The machine would have an expected life of 5 years and would have a terminal value of $20,000. Annual demand of product "Amino is projected to be 150,000 units. In that industry, average investment attract a cost of capital of 10% per annum. Required: is the new investment worthwhile or should the new machine be purchased?

Answer rating: 100% (QA)

To determine whether the new investment in the machine is worthwhile or not we need to calculate the ... View the full answer